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You might be wondering if you can refinance federal student loans and, if so, if it’s a good idea. Student loan refinancing can be a great way to tackle your debt and save money. Keep reading to find out more about refinancing federal student loans and how to decide if it’s right for you.

Can you refinance federal student loans?

The short answer is “yes.” You can absolutely refinance your loans — in fact, you can refinance both private student loans and federal student loans. If you have both federal and private loans, you can actually refinance them together, so you’ll have just one loan and one easy payment to remember. The bigger question is whether or not it’s a good idea.

Does it make sense to refinance federal student loans?

There’s no hard and fast rule on if refinancing federal student loans is a good idea or not. It’s completely dependent on your individual situation and your comfort level. When deciding whether or not it’s right for you, ask yourself the following questions.

1. How much money can you save?

One of the best perks of refinancing is that you can save a substantial amount of money. However, whether that’s true for you is dependent on the current interest rate on your federal student loans.

If you have a lower interest rate — rates on federal loans to undergraduates have been as low as 3.4% in recent years — you’re unlikely to get a lower rate by refinancing, so it might not be a wise decision. If you have a higher interest rate — such as PLUS Loans, which have been as high as 7.9% — the savings could be significant.

Let’s say you had $28,000 in student loans at 7.6% interest, the rate for PLUS loans issued during the 2018-19 academic year. If you were on a standard 10-year repayment plan, your monthly payment would be $334, and you’d repay a total of $40,059 over the life of your loan.

If you refinanced that debt and qualified for a 10-year loan at just 4.5% interest, you’d repay far less. Your monthly payment would be $290 a month, and you’d repay just $34,823. Refinancing your student loan debt would help you save over $5,000.

2. Do you plan on using federal repayment benefits?

One thing to keep in mind is that when you refinance your federal student loans, you’ll lose certain federal benefits, such as:

  • Access to income-driven repayment plans: If you can’t afford your payments on your federal loans, you can sign up for an income-driven repayment (IDR) plan (like income-based repayment), which can dramatically reduce your bill. When you refinance, you’re no longer eligible for IDR plans.
  • Ability to qualify for loan forgiveness: There are some federal loan forgiveness programs, like Public Service Loan Forgiveness, that will discharge your balance after several years of making payments. But when you refinance, you no longer qualify for forgiveness.
  • Option to defer your loans or enter forbearance: If you face financial hardship, such as job loss, you can opt to defer your federal student loans or enter into forbearance, which means you can postpone making payments without entering into default. But once you refinance your student loan debt, you lose this option.

A private lender might offer different repayment plans or programs for financial hardship if you refinance with them, but not all do. Carefully weigh your options to see if you’ll need to use federal benefits before you decide to refinance.

3. If you refinance, what are the repayment terms?

Federal student loans have fixed interest rates, which means the interest rate stays the same for the length of the loan. And because there are multiple repayment plans, you can have up to 30 years to repay your loan.

Refinancing can be quite different. Some refinancing lenders offer a variable rate, which start off low, but can fluctuate over time. And, loan repayment terms can be as short as five years. Typically, the lowest loan rates are reserved for shorter repayment terms, which can affect how affordable the loan is for you.

If you’re struggling to make your loan payment each month, though, you might prefer to lengthen your repayment term. This won’t save you on interest (you’ll actually pay more), but it can be helpful if you need more cash flow on a month-by-month basis since it will lower your monthly payment.

If you’re considering refinancing, make sure you understand the interest rate, how it will affect your balance and monthly payment, and how long you’ll have to repay your loan.

Deciding to refinance your student debt

When it comes to refinancing student loans, it isn’t right for everyone. However, for many federal student loan borrowers, it can be a smart way to save money and pay off debt ahead of schedule. Make sure you do your homework so you make an informed decision on how to manage your loans.

If you decide that it’s right for you, make sure you compare rates from multiple refinancing lenders to make sure you find the best loan for your financial situation.

About the author
Kat Tretina
Kat Tretina

Kat Tretina is an authority on student loans and a contributor to Credible. Her work has appeared in publications like the Huffington Post, Money Magazine, MarketWatch, Business Insider, and more.

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