What you should know about refinancing your federal student loans
Refinancing federal student loans can get you a lower interest rate, but you’ll lose protections.
Refinancing your student loans is a good way to simplify your finances by combing your various monthly payments into one new monthly bill with only one lender.
Those who qualify for refinancing are ready to shorten or lengthen their loan repayment term according to what works best for their finances, and they may score a lower interest rate as well.
Sound too good to be true? For federal student loan borrowers specifically, there's a catch.
For borrowers who have U.S. Department of Education loans, the only option is to refinance through a private lender, sort of a big bank, credit union or online lender. the government doesn't offer refinancing options, just a Direct Consolidation Loan program.
Once a federal student loan borrower swaps in their loans for a refinanced loan through a private lender, however, they lose all of the federal loan protections they once had.
If you’re a federal student loan borrower, you would like to remember ahead of time what you'll miss out on by moving over to a private company. These unique governmental protections set in place for federal borrowers offer peace of mind you'll not be willing to give up — most notably the federal student loan freeze that’s in place freeze through September 2021 and a current interest rate of 0%.
Here are some of the additional protections:
- Deferment and forbearance for up to 3 years (and with subsidized federal loans, you aren’t charged interest during deferment)
- Access to income-driven repayment plans that recalculate your monthly bill based on any changes in income
- Forgiveness programs for sure jobs through Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness
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Plus, if the Biden administration does find yourself moving forward with any kind of widespread student loan forgiveness, borrowers who chose to refinance with a private lender will no longer qualify for cancellation.
Consider a private lender that provides their own protections
With federal student loan payments and interest on pause through September 2021, now's not the time to be refinancing federal loans. However, when this Covid-related postponement period ends and if you wish to undertake locking in a very lower interest rate through refinancing, know that there are some private lenders that have their own payment protection for borrowers. These protections won’t be as extensive as what you'd receive with federal loans, but at least it’s some kind of security.
Protections may include deferment within the case of unemployment or economic hardship, also like the choice to make interest-only payments before your repayment term begins.
SoFi Student Loan Refinancing, as an example, offers borrowers the following:
- Unemployment protection (forbearance offered in 3 month increments, capped at 12 months)
- Covid forbearance of payments for a minimum of 90 days, if experiencing financial hardship
- Loan deferment, if going back to high school
- First six months of pre-existing grace period on loans looking to be refinanced
For borrowers with federal and private student loans
While you must hold off on refinancing your federal student loans during their current payment suspension, the opposite is true for your private student loans.
the Covid-induced forbearance doesn't support private student loans, your monthly payments are still due and interest has continued to accrue. For this reason, you'll want to think about refinancing just your private student loans if your interest rate is high, or if your credit score has improved since you initially took out the loan. now's a decent time to require advantage of the historically low rates before they are going up again.
Regardless of whether you choose to refinance today, know that a lot of private lenders have put into place some kind of payment relief for borrowers experiencing financial hardship. make certain to ask your specific lender if they're offering any assistance at now and the way to qualify.
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