Should You Refinance Your Federal Student Loans?

The amount of interest that accrues on your student loans significantly affects how much you pay overall. Therefore, it’s unsurprising that borrowers look for ways to lower their interest rates. One of the most common methods for lowering interest rates on student loans is refinancing. (Refinancing means consolidating your existing student loans into a single, new loan with a different interest rate and repayment term.)

You can refinance both federal and private student loans, although there are some reasons why you may not want to refinance federal student loans. In this article, you’ll learn how refinancing federal student loans works and whether or not you’re a good candidate for it.

When to Refinance Your Student Loans

While the primary goal of refinancing student loans is to lower interest rates and monthly payments, it’s not always right decision for everyone. There are specific scenarios and criteria, though, that make it a wise decision, including:

You qualify for a lower interest rate.

It only makes sense to refinance if your interest rates will go down. Do some quick research to find out what current interest rates are for refinanced student loans. These rates fluctuate based on market trends, so even if they are currently low, that could change at any time.

In your research, you will see that most lenders advertise a range of interest rates. This is because the interest rates vary based on the individual borrower. The rate you receive is based on your application, although most lenders will let you check what your new interest rate will be prior to submitting a full application.

Once you confirm the new interest rate and repayment terms, use a student loan interest calculator to make sure you will save money by refinancing. If you will, then you’re good to go.

You want a single monthly payment.

Having multiple loans through multiple lenders means keeping track of several payments throughout the month. When you refinance, you consolidate multiple existing loans into a single new loan with one monthly payment, so you have a few less bills to worry about paying each month.

You want to switch from a variable to a fixed interest rate, or vice versa.

Private loans come with either fixed or variable interest rates. A fixed interest rate stays the same throughout the life of the loan, regardless of how overall interest rates fluctuate. A variable interest rate changes with market trends, meaning it can increase or decrease from the rate at which you initially borrow the loan.

Both types of interest rates have their advantages and disadvantages, and one type of loan may have suited you better at a different point in time. If you want to switch from a fixed to a variable interest rate, or vice versa, refinancing will allow you to do so.

You have a stable monthly income.

This primarily applies to individuals who want to refinance federal student loans, which are eligible for income-driven repayment plans. However, when you refinance a federal loan with a private lender, you are no longer eligible for these repayment options and will be locked into a set minimum monthly payment.

If you don’t anticipate needing to adjust your loan payments based on your income, refinancing is a viable option for lowering your interest rate.

You want to switch loan servicers.

The entity that lends you the money for your loan is your loan servicer. When you refinance, you can switch to a different loan servicer that may offer better customer service, local branches, or other perks.

When Not To Refinance Your Student Loan

There are some scenarios when you should avoid refinancing your student loans, because it’s not as favorable to you, including:

Your interest rate won’t change or will increase.

If the math doesn’t check out, and your interest rate won’t decrease (or will actually increase), keep your loans as they are. Continue to check on interest rates to see if more favorable terms become available.

You are on an income-driven repayment plan.

Only federal student loans are eligible for income-driven repayment plans that calculate your monthly payment as a percentage of your discretionary income. Once you refinance loans with a private lender, you can no longer enroll in an IDR plan — meaning you cannot refinance loans through the federal government. Private lenders do not have to consider your income when determining your monthly loan payment.

You are enrolled in a loan forgiveness program.

Federal student loans are also eligible for plans like the Public Service Loan Forgiveness program and the Teacher Loan Forgiveness program. However, loans refinanced through private lenders are no longer eligible for these programs either.

You have a low credit score.

To be eligible for refinancing, borrowers typically have to have a credit score of 650 or higher. If your credit score is below 650, you can apply to refinance your student loans if you have a cosigner with a high credit score. You can still research refinancing options without high credit or a cosigner, but be prepared to build up your credit score in order to get interest rates that are really worth your while.

You’ve defaulted on your student loans or other debts.

As part of the application process, the lender digs into your financial history. This includes a credit check, which will reveal if you have defaulted on any loans or debts, or have a history of missing payments. These situations can make you ineligible for refinancing.

You’ve already paid off a significant amount of your student loan.

While a 20-year repayment term with significantly lower interest than your current loan can sound tempting, consider how far along you are in your current repayment plan. Even if your refinanced loan has a lower interest rate, if you extend your repayment term, you could end up paying more in the long run than if you stick with your current loan terms.

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