When you refinance federal student loans with a private lender, you do give up some borrower protections that can serve as a safety net if you run into unexpected financial difficulties.
But many borrowers decide that the savings they can achieve by refinancing is worth more to them than the federal borrower protections they give up. Here are some factors to consider when weighing the pros and cons of refinancing student loans.
In this post:
Risks of refinancing federal student loans
Before refinancing federal student loans with a private lender, weigh the savings that you’ll achieve against the value of the following federal borrower benefits, which private student lenders typically can’t match. Here are a few of the risks:
- Losing access to income-driven repayment
- Missing out on potential loan forgiveness
- No interest-free payments during deferment or forbearance
- Limited options for loan discharge
Losing access to income-driven repayment
If you refinance federal student loans with a private lender, you will no longer have access to federal income-driven repayment (IDR) plans like PAYE and REPAYE, which can provide relief by reducing your monthly payment to no more than 10% or 15% of your discretionary income.
If you become unemployed — or if your student loan debt is much larger than your annual income — an IDR plan can protect you from defaulting on your loans. Although some private lenders offer special repayment option for distressed borrowers, most do not.
The tradeoff is that in an IDR plan, you’ll often stretch your payments out over a longer period, which can mean thousands of dollars in additional interest payments. You can use the Department of Education’s repayment estimator to get an idea of what your total repayment costs will be in an IDR plan, but be aware of its shortcomings.
Missing out on potential loan forgiveness
Refinancing federal student loans with a private lender closes the door on some options for loan forgiveness. Borrowers who enroll in a federal IDR plan may qualify for loan forgiveness if they still haven’t managed to pay off their debt after 20 or 25 years. Keep in mind that if you do qualify for loan forgiveness, the amount forgiven is currently considered taxable income by the IRS.
If you work for the government or qualified non-profit, you may qualify for tax-free Public Service Loan Forgiveness after making just 10 years of payments in an IDR plan. If you think you will qualify for Public Service Loan Forgiveness, refinancing your federal student loans is probably not your best option.
No interest-free payment postponements
Private lenders will accept applications for deferment or forbearance during times of financial hardship. However, interest on private student loans will continue to accrue in both deferment and forbearance.
With federal student loans, borrowers can request deferment or forbearance if they go back to school, become ill, or experience financial hardship. With certain need-based subsidized federal loans, you won’t pay interest charges while your federal loans are in deferment. However, you will be assessed interest on all types of federal loans during forbearance.
Limited options for loan discharge
Private lenders’ policies on loan discharge vary — make sure to read the fine print before refinancing.
If you are refinancing with a cosigner, find out what their obligations will be if you die or are disabled. Federal loans can often be forgiven if you were defrauded by the school you attended, or if you die or become disabled.
Benefits of refinancing federal student loans
Depending on your goals, refinancing your federal student loans with a private lender may help you:
- Paying your loans off faster
- Reducing your total interest charges
- Lowering your monthly payment
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Paying your loans off faster
When you refinance your student loans, you’ll typically have a choice of repayment terms ranging from 5 to 20 years. The shorter the repayment term, the lower the interest rate offered by most lenders. Your monthly payments will also be higher with a shorter term, but you’ll save interest by getting a lower rate and paying your loan off faster.
Reducing your total interest charges
Your total interest charges will depend both on your interest rate and your repayment term (how long you take to repay your loan). If you’re most interested in reducing your total interest charges, choose a loan with the shortest repayment term you can afford to make the monthly payments on.
Lowering your monthly payment
Borrowers who are most interested in lowering their monthly payment will often refinance into a loan with a longer repayment term. As is the case when stretching out your payments in a federal IDR plan, you may end up paying more interest.
If you’re just looking for the simplicity of having a single monthly payment, federal loan consolidation might be a better option than refinancing. You won’t get a better interest rate, but you may lower your monthly payment by extending your loan term.
You can also use Credible to request personalized rates from the student loan refinancing lenders below.
| Lender | Variable APR | Fixed APR | Terms (Years) | ||||||||||||||||
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 Advantage Education Loans | Get Rates | N/A Variable APR | 4.54%+ Fixed APR | 10, 15, 20 Terms (Years) | Get Rates | ||||||||||||||
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 Brazos | Get Rates | 4.01%+ Variable APR | 3.91%+ Fixed APR | 5, 7, 10, 15, 20 Terms (Years) | Get Rates | ||||||||||||||
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 Citizens Bank | Get Rates | 2.29%+¹ Variable APR | 3.45%+¹ Fixed APR | 5, 7, 10, 15, 20 Terms (Years) | Get Rates | ||||||||||||||
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 College Ave | Get Rates | 2.62%+2 Variable APR | 3.54%+2 Fixed APR | 5 to 20 Terms (Years) | Get Rates | ||||||||||||||
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 EDvestinU | Get Rates | 4.64%+5 Variable APR | 4.93%+5 Fixed APR | 10, 15, 20 Terms (Years) | Get Rates | ||||||||||||||
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 ELFI | Get Rates | 2.39%+3 Variable APR | 3.14%+3 Fixed APR | 5, 7, 10, 15, 20 Terms (Years) | Get Rates | ||||||||||||||
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 MEFA | Get Rates | 4.08%+ Variable APR | 3.95%+ Fixed APR | 7, 10, 15 Terms (Years) | Get Rates | ||||||||||||||
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 PenFed | Get Rates | 2.42%+ Variable APR | 3.48%+ Fixed APR | 5, 8, 12, 15 Terms (Years) | Get Rates | ||||||||||||||
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 RISLA | Get Rates | N/A Variable APR | 3.49%+ Fixed APR | 5, 10, 15 Terms (Years) | Get Rates | ||||||||||||||
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 SoFi | Get Rates | 2.31%+4 Variable APR | 3.46%+4 Fixed APR | 5, 7, 10, 15, 20 Terms (Years) | Get Rates | ||||||||||||||
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All APRs reflect autopay and loyalty discounts where available | 1Citizens Bank Disclosures | 2College Ave Disclosures | 3 ELFI Disclosures | 4SoFi Disclosures | 5EDvestinU Disclosures |
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Citizens Bank Education Refinance Loan Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate ("LIBOR") published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of November 1, 2019, the one-month LIBOR rate is 1.80%. Variable interest rates range from 2.15%-8.82% (2.15%-8.82% APR) and will fluctuate over the term of the borrower's loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a co-signer. Fixed interest rates range from 3.45%-9.02% (3.45%-9.02% APR) based on applicable terms, level of degree earned and presence of a co-signer. Lowest rates shown are for eligible, creditworthy applicants with a graduate level degree, require a 5-year repayment term and include our Loyalty discount and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty and Automatic Payment Discount disclosures. The maximum variable rate on the Education Refinance Loan is the greater of 21.00% or Prime Rate plus 9.00%. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change. Please note: Due to federal regulations, Citizens Bank is required to provide every potential borrower with disclosure information before they apply for a private student loan. The borrower will be presented with an Application Disclosure and an Approval Disclosure within the application process before they accept the terms and conditions of their loan. |
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