Is Now a Good Time to Refinance Your Federal Student Loans?
You may be wondering if it's a good idea to refinance federal student loans to private student loans. Learn more about the pros and cons here.
When it comes to refinancing student loans, you want to make sure the new interest rate is lower than the current interest rate in order to save on costs. But even if rates are low, is it a good idea to refinance federal student loans?
While there may be advantages to doing so, now might not be the best time. That’s because qualifying federal student loan payments are on pause until the end of the year. Plus, President Biden announced a plan to cancel up to $20,000 for eligible federal student loan borrowers.
Of course, if you have private student loans, it probably makes sense to refinance to a lower interest rate. But for federal student loans, it may be better to use this time before the payment pause is over to work toward other financial wellness goals, such as building an emergency fund and paying off other high interest debt.
Is It Really a Bad Idea to Refinance Federal Student Loans?
Unless you have a compelling reason to do so, refinancing your federal student loans isn’t the best choice. As mentioned before, the federal government is offering a lot of help for borrowers.
Once the payment pause is over and some of your debt has been canceled, you can start to think about your circumstances and whether it makes sense to refinance.
It’s important to recognize that federal student loans come with benefits that are not available with most private student loans. Here are some of the benefits you could lose if you refinance your federal loans to private loans:
- Debt cancellation: You may qualify for up to $20,000 in federal student loan cancellation. The application form won't be released until later this year, and eligible borrowers can submit their application until the 2023 deadline.
- Payment waiver: Until the end of December, the federal government is suspending loan payments and waiving interest on federal loans.
- Student loan forgiveness: There are several programs that can significantly lower the amount you'll owe, such as Public Service Loan Forgiveness and Teacher Loan Forgiveness.
- Loan deferment and forbearance: You may qualify to pause your payments temporarily if you experience financial hardship. If you defer your loans, you won't have to pay interest on subsidized loans. With forbearance, interest will accrue on subsidized and unsubsidized loans.
- Income-driven repayment plans: These plans make your loan payments more affordable since they’re based on your household size and current income. In other words, you typically pay a percentage of your discretionary income.
Is Student Loan Refinancing Possible?
Yes, you can refinance your federal student loans to private student loans but not the other way around. There are financial risks associated with refinancing, such as forgoing federal student loan benefits. However, refinancing might be worth considering if you can save a significant amount in interest (after accounting for any origination fees) and if your job or income situation will be steady for the foreseeable future.
For example, say you have a $40,000 student loan with the federal government with a 6% interest rate and a 15-year repayment term. Your monthly payment is $337.54, and you’ll end up paying $20,757.69 in interest over the life of the loan. If you refinance to a 3.5% interest rate with the same loan term, your monthly payment will drop to $285.95 and you’ll pay $11,471.54 in interest overall, saving you $9,286.15.
Of course, private lenders typically reserve the lowest interest rates for borrowers with good credit scores and low debt-to-income ratios. Basically, the higher your credit score and the lower your debt-to-income ratio, the more likely you’ll qualify for better rates.
Remember, refinancing to private student loans means you’ll give up federal student loan benefits, so make sure that’s worth it before you make the switch.
How to Refinance Federal Student Loans to Private Student Loans
Refinancing student loans is a fairly straightforward process, though each private lender has its own guidelines.
Before you submit an application, it’s a good idea to shop around with multiple lenders. That way, you can find features and benefits that work for your situation. Plus, you’ll be able to compare multiple rates and repayment terms to help you find the most competitive offer for your credit profile. Some lenders offer a soft credit check so you can see what you may qualify for without affecting your credit score.
If you find that you won’t be able to qualify for the best rates (or at all), you may want to consider asking someone to be your co-signer — typically someone with a good credit profile— to increase your chances of qualifying.
Once you’ve decided on the lender you want to go with, contact the lender or head to its website and fill out the application. You’ll typically need to provide details such as your contact information, Social Security number, and information about the loan you want to refinance. In most cases, you’ll also be asked to provide proof of income.
Once you’ve submitted the application, it’s time to wait for approval for your new loan. In the meantime, don’t forget to keep making payments on your existing loans so you’re not at risk of late or missed payments.
Whether you’re sticking with your existing loans or want to refinance to a private lender, you want to make sure you understand exactly what you’re getting into. That way, you can prepare financially to make your monthly payments and achieve any other financial goals you’ve set.
If you decide refinancing is right for you, consider joining Juno. Juno negotiates on behalf of borrowers with partner lenders to help each student qualify for the best rates they can given their financial situation.
Sarah Li Cain
Sarah Li Cain is a finance writer and a candidate for the Accredited Financial Counselor designation whose work has appeared in places like Bankrate, Business Insider, Financial Planning Association, Investopedia, Kiplinger, and Redbook. She’s the host of Beyond The Dollar, where she and her guests have deep and honest conversations about money affects their well-being.
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