Should you Refinance your Federal Student Loans?

Total Student Loan Debt in US (Source)

Feeling buried by the weight of federal student loans? You’re in good company. According to the Federal Reserve, the nation’s student loan burden is rising at a rate of $2,698.30 per second, and there’s currently 1.4 trillion and counting in student loan debt.

If you have several student loans, it’s time-consuming and overwhelming to keep track of them. You may also wonder if you’re paying more interest than necessary. It could make financial sense to refinance your federal student loans. Combining them all into one loan can save you money and allow you to get out of debt more quickly.

The current student debt amount is rising at a rate of $2,667.2 per second. This number is estimated by calculating the per second change in student debt from Q1 2006 to Q4 2016 using debt data from the Federal Reserve (not seasonally adjusted). Source:
Federal Reserve. As of February 2017

Top reasons to refinance your federal student loans

Lock in a lower interest rate
It’s possible that you can get a student loan interest rate that’s lower than what you’re currently paying, which can mean significant savings over the life of the loan. This also means that you’ll have one low interest rate for all your student loans.

Lower overall monthly payment.
Refinancing and combining all your loans into one can mean paying less each month. If you’re struggling to pay your bills, refinancing may be the ideal option.

Shorter loan term
If you have several student loans that you’ve taken out during your college career, there’s a good chance that the length of time remaining on the loans varies. Refinancing may allow you to shorten the loan term so that you can pay the debt sooner.

One monthly bill
Combining all your student loans into one makes it much easier to keep track of what’s owed and when.

Release a cosigner
If you weren’t able to qualify for a student loan on your own and had to get a cosigner, you might wish to remove that person from your loan. Refinancing your student loan may enable you to do this, if you’ve built up some credit and have a steady income and good payment history

Refinancing rules

Before you make any moves to refinance your federal student loans, it’s important that you understand the rules. Here is a breakdown:

If you have more than one federal student loan, Uncle Sam allows you to consolidate them all into one loan. This gives you one bill and a potentially lower overall monthly payment. The interest rate for this consolidated loan is fixed over the life of the loan.

This fixed rate is based on the weighted average of the interest rates of all of your existing federal student loans and is then rounded up to the nearest 1/8th of 1%. Uncle Sam only consolidates federal student loans–not private ones.

Private student loan lenders work differently. Rather than consolidating and averaging an interest rate like Uncle Sam, they refinance your loan and give it a whole new interest rate. If you have more than one private loan, they will consolidate those loans during the refinancing process. This means that you could get a substantially lower interest rate than you currently have.

Most private student loan lenders only refinance or consolidate other private student loans. There are a few private lenders that will consider refinancing federal loans with private loans. These lenders include:

LenderAPR Range 
SoFiVariable: 2.355%- 6.36%

Fixed: 3.38% – 6.99%

Apply
LendKeyVariable: 1.93% – 6.92%

Fixed: 4.5% – 5.5%

Apply
Common BondVariable: 1.94% – 5.01%

Fixed: 3.74% – 6.74%

Hybrid: 3.82% – 6.26%

Apply

The private lender determines the interest rate on your new loan by looking at a variety of factors, including if you pay your bills on time and the prevailing interest rate. Some lenders consider your credit score.

Drawbacks of refinancing federal student loans

Before you rush into refinancing your federal student loans with a private lender, know that you give up certain benefits and consumer protections that aren’t usually offered by private lenders. These include income-driven repayment plans, as well as deferral, which allows you to stop making payments while you’re in school. Forbearance enables you to stop making payments or reduce your monthly payments for up to 12 months, if you lose your job or go through financial difficulties..

Some private student loan lenders do offer alternative repayment options in the case of economic hardship, such as interest only and cancellation in the event of death.

If you switch to private loans, you will also give up the option to take advantage of public service loan forgiveness. This applies to individuals in certain occupations, including the Peace Corp, military, law enforcement and service professionals like teachers, doctors and lawyers. Service professionals must work for an eligible nonprofit and have made at least 120 months of qualifying payments.

Determine if refinancing is right for you

Since you may give up important benefits when you refinance a student loan, it’s important to check that doing so is the right decision for you. To make the best decision possible, consider the following:

Can you save money?

Determine whether the savings will justify the time and effort required before you refinance your federal student loans. Your savings will depend on your current interest rate and how much you owe. To see how much you’ll save with a refinance, compare your current loan with a potential loan using LendKey’s student loan refinancing calculator.

To find out what interest rate you’re eligible for, many private student loan lenders will do a soft credit pull and provide you with an interest rate.

Certain types of federal student loans tend to have higher interest rates, as this chart show. The rates also vary by year. Considering that current interest rates at private lenders, such as SoFi, are 3.375% APR for a fixed rate, it may not make sense to refinance a 2016-17 direct subsidized or unsubsidized undergraduate loan. It would be a good idea, though, to refinance 2015-16 loans and graduate and Parent Plus loans.

Savings scenario:

If you have a 10-year 2015-16 Direct Subsidized Undergraduate loan for $10,000 at 4.29% APR and refinanced for 3.375% APR, you would save $519 over the life of the loan. In comparison, if you have a 10-year Direct Unsubsidized Graduate Loan from 2015-16 for $10,000 at 5.84% and refinanced for 3.375%, you would save $1,430 over the life of the loan.

Consider the pros and cons when deciding if you should refinance your federal student loans. If you’re ready to consider the possibilities of saving money, take a look at our Student Loans Reviews page.

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