Should You Refinance Federal Student Loans?

Student loan refinancing can help you save money if you qualify for lower interest rates. But even if you’re offered the lowest rates, should you refinance your federal student loans?

Refinancing federal loans with a private lender waives your access to government programs that can give you more flexible repayment options and even forgiveness.

If you have private student loans, refinancing remains a good option if you can lower your interest rate, but think twice about refinancing federal loans.

What does refinancing student loans mean?

When you refinance, a private lender pays off your existing student loans and issues you a new private loan with new terms, including a lower rate. This can save you money, and — if you refinance multiple loans — you’ll have just one monthly payment to budget for.

You can only refinance student loans with a private lender — and once you refinance government loans, you can’t refinance them back to federal student loans.

Can you refinance federal student loans?

It’s possible to refinance federal student loans; however, you risk losing government benefits, including:

Access to potential loan forgiveness. If you teach or work in public service or for a nonprofit, you would lose access to the federal Public Service Loan Forgiveness and Teacher Loan Forgiveness programs, which forgive your loans tax-free after a certain number of years.

Flexible repayment plan. These include income-driven repayment plans, which can make your monthly payments more manageable. These plans base payments on your income and family size and forgive your remaining debt after 20 or 25 years of repayment. Some private lenders offer plans that decrease your payments temporarily, but few offer income-driven plans.

Interest-free payment postponements. If you lose your job or run into financial issues, you may be able to temporarily pause repayment via deferment and forbearance. During deferment, interest does not accrue on subsidized federal student loans. Interest usually accrues on unsubsidized loans, as well as on all loans during forbearance. Some refinance lenders offer postponement options, but you are usually responsible for the interest.

Loan discharge options. Remaining federal loan debt may be eliminated in instances such as school fraud or if you, or the borrower benefiting from the loan, die or become totally and permanently disabled. Discharge options vary by refinance lender.

When to refinance federal student loans

The main reason to refinance government loans is to save money. If you don't need the federal loan benefits, refinancing student loans could offer long-term savings on high-interest federal loans.

For example, say you owed $30,000 with a 7% interest rate and 10 years on your repayment term. Refinancing at a 5% interest rate — roughly the best you could expect — would save you around $3,600.

There are additional advantages to refinancing, including:

• Make a single loan payment each month. If you also have private student loans, you can refinance them together with federal loans.

• Switch student loan servicers. You'll get a new servicer through your refinancing lender, which you may want if you've been unhappy with your federal loan servicer.

In some instances, it may make sense to refinance only some of your federal loans. For example, you could refinance your higher-interest PLUS loans from graduate school, but not your undergraduate direct loans. This would keep part of your federal protections in place, should the unexpected happen in the future.

» MORE: Best student loan refinance companies

When not to refinance federal student loans

The federal government has the ability to offer borrower protections, which means it’s helpful to think about more than the interest rate when deciding whether to refinance. Consider the following:

• Will your job be at risk in the coming months?

• Would you struggle to afford all your financial obligations if your employment changes?

• Do you qualify for other federal loan forgiveness programs?

If the answer is "yes" to any of these questions, think twice about refinancing.

To keep federal benefits, you can consolidate federal student loans instead of refinancing. Consolidation takes several federal student loans and combines them into one new loan. While federal consolidation won’t lower your interest rate, you can gain federal protections and benefits when consolidating non-direct loans into a direct loan.

» MORE: Learn the differences between consolidation and refinancing

How to refinance federal student loans

To qualify for refinancing, you’ll typically need good credit (a FICO score in at least the high 600s) and a debt-to-income ratio less than 50%. If you wait to refinance, work to exceed those benchmarks to get the lowest rate possible when you do apply.

If you've decided now is the best time to refinance your federal loans, here’s how to get started:

1. Get estimates. Review offers from multiple lenders to find the best deal. Most private lenders will pre-qualify you via a soft credit check so you can see your new interest rate.

2. Choose a lender. Once you select a lender that best fits your needs, you’ll complete an application. Plan to have verifying documents such as proof of employment, residency and graduation.

3. Wait for loan payoff. Your refinance lender will pay off the debt to your current lender. Moving forward, you’ll make payments to your new lender.

» MORE: How to refinance student loans in 7 steps