8 Pros and Cons of Refinancing Federal Student Loans

Federal student loans typically have lower interest rates than private student loans, but borrowers with excellent credit can often find lower rates elsewhere. Today, federal loans can have rates as high as 7.54%, and in the past, they’ve been as high as 8.5%.

If you have good credit and a reliable income, refinancing federal student loans can be a smart idea. You can potentially lower your interest rate and save thousands of dollars, but there are several risks involved. Here’s what you should consider before deciding to refinance federal student loans.

Refinancing Federal Student Loans: How It Works

Can you refinance federal student loans? Sure, but whether it’s a good idea or not is a more complicated question.

To refinance federal student loans, you search for a private lender that offers student loan refinancing. You submit your loan application and request a loan that is large enough to cover your existing education debt. If approved, the private lender will pay off your current federal loans, and you’ll have a new loan going forward.

Refinancing your loans means you’ll have completely different terms than you had before. You’ll have a new interest rate, repayment term, minimum payment and loan servicer.

When you refinance federal student loans, they become private loans and you can’t take advantage of federal loan benefits anymore. Keep in mind that the process isn’t reversible. You cannot refinance private student loans to federal; they will always be private loans.

Weigh the Pros and Cons of Refinancing Federal Student Loans

Pros	Cons
You can get a lower interest rate	You’re no longer eligible for income-driven repayment
You can pay off your debt faster	You won’t qualify for loan forgiveness programs
You can combine multiple loans into one	You’re no longer eligible for federal deferment or forbearance
You can transfer parent loans to a child	Not everyone qualifies for refinancing

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1. Pro: You Can Get a Lower Interest Rate

Depending on when you took out your federal loans and the type of loans you have, you could have a relatively high interest rate. By refinancing your loans, you may qualify for a lower rate and save money over the life of your loans.

You can typically choose between a variable and fixed-rate loan when you refinance your debt. Right now, refinancing lenders offer rates starting around 2% for borrowers with excellent credit and a reliable income.

2. Pro: You Can Pay Off Your Debt Faster

If you refinance your loans and qualify for a lower rate, more of your payments will go toward the principal instead of interest charges. You can also use this opportunity to shorten your repayment term if you choose.

If you shorten your repayment period from seven years to five, for instance, your monthly payments may increase but you can save money in the long-term by getting rid of your debt faster. If you are determined to get rid of your debt quickly, you can pay off your loans months or even years ahead of schedule.

3. Pro: You Can Combine Your Loans Into One

The typical college graduate will have eight to 12 different student loans by the time they leave school. Managing so many loans, payments and due dates can be a recipe for disaster. It’s easy to get dates and loan servicers confused, causing you to miss payments and damage your credit.

When you refinance your loans, your loans are combined into one. You can even combine federal and private student loans together, so you’ll only have one monthly payment to remember.

4. Pro: You Can Transfer Parent Loans to a Child

If you’re a parent that took out parent PLUS loans to pay for your child’s undergraduate education, there is a major advantage to refinancing your loans: You can transfer them to your child. Some refinancing lenders allow your child to refinance the loans and take ownership of the debt. If your child is approved, your debt will be paid off and you’ll no longer be responsible for its repayment.

5. Con: You’re No Longer Eligible for Income-Driven Repayment

As a federal loan borrower, you’re eligible for income-driven repayment (IDR) plans. If you qualify, your loan servicer will calculate your payment based on a longer term and a percentage of your discretionary income. Plus, any remaining debt can be forgiven after 20 or 25 years depending on your circumstances.

You could qualify for a much lower monthly payment, but you’re no longer eligible for IDR plans once you refinance your debt.

6. Con: You Won’t Qualify for Loan Forgiveness Programs

Federal loan borrowers are eligible for loan forgiveness programs like Public Service Loan Forgiveness and Teacher Loan Forgiveness. But once you refinance your federal loans, you’re no longer eligible for federal forgiveness programs.

During his run for office, President Joe Biden supported $10,000 of federal loan forgiveness per borrower. While there hasn’t been any update on this proposal, it’s important to note that widespread loan forgiveness would likely only apply to federal loans, not private ones. If you refinance your federal loans and a loan forgiveness measure is passed, you could miss out on that benefit.

7. Con: You’re No Longer Eligible for Federal Deferment or Forbearance

With federal student loans, you can take advantage of generous deferment or forbearance if you’re experiencing financial hardships, become seriously ill or return to school. Depending on the type of forbearance or deferment you qualify for, you could postpone your payments for up to three years.

Only federal borrowers are eligible for those programs. Once you refinance, you can’t utilize them. And while many refinancing lenders offer their own financial hardship programs, most aren’t as flexible as the federal options.

8. Con: Not Everyone Qualifies for Student Loan Refinancing

To qualify for student loan refinancing—and to get the best rates—you typically need good to excellent credit and reliable income. If you don’t meet those requirements, you likely won’t qualify for a loan unless you have a co-signer that applies for a loan with you.

Should I Refinance My Federal Student Debt?

Refinancing federal student loans isn’t always a good idea. However, it can make sense in the following scenarios:

1. You Have High-Interest Loans

If you have high-interest federal loans, such as parent or grad PLUS loans, refinancing can be a smart decision. Depending on your credit and other debt, you could qualify for a much lower rate and save a substantial amount of money.

The average student loan balance is $39,341, according to Experian. If you had that amount at a 6.28% interest rate and a 10-year term, you will pay $56,136 by the end of your repayment term. But if you refinance and qualify for a 10-year loan at 4% interest, you’ll pay just $47,500—a savings of over $8,600.

You can use a student loan refinance calculator to find out how much you can save.

2. You Aren’t Eligible for Loan Forgiveness

If you’re eligible for programs like PSLF or Teacher Loan Forgiveness, refinancing your loans before you qualify for loan forgiveness is a costly mistake. But if you don’t qualify for forgiveness, you can refinance your loans to save money and pay off your loans faster.

3. Your Job and Finances Are Secure

Because refinancing federal loans turns them into private debt, you lose access to federal perks like income-driven repayment plans. If you work in a volatile industry or live paycheck-to-paycheck and may need those benefits, refinancing your loans likely isn’t wise.

But if you have a secure job and have a large emergency fund, you can probably refinance without those worries.

4. You Want to Transfer Parent PLUS Loans to Your Child

If you have parent PLUS loans, refinancing your debt can be a wise decision. If your child is financially stable and able to afford the payments, they can take over the loans and remove your obligation to repay the loan. Once they’re refinanced, the loans will show up as paid in full on your credit report, making it easier for you to qualify for other forms of credit—such as a mortgage—in the future.

5. You Want to Aggressively Repay Your Loans

When deciding whether to refinance your loans, consider how aggressively you want to tackle your debt. If you’re determined to pay them off as quickly as you can, refinancing your federal loans can help you achieve your goals.

If you refinance your debt and opt for a shorter loan term, you could get an even lower interest rate. You’ll save thousands more, and get out of debt years earlier.

For example, say you have $39,341 of student loans with a 6.28% interest rate and 10-year term. If you refinance to a five-year term and qualify for a 3% interest rate, you’d pay just $42,414 over the life of the repayment term. That’s a total savings of more than $10,500 over the original loan terms. Plus, you’d be debt-free five years sooner.

If you’ve weighed the pros and cons of refinancing federal student loans and decide to move forward, check out our selections for the best student loan refinance lenders.