Should You Refinance Your Student Loans?

December 9, 2023

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Answer these questions to reveal if refinancing would benefit your debt situation.

If you have good credit, you may be able to refinance your existing federal student loans into a private loan. Before doing that, it’s important to understand the full impact of making this permanent change to your loans.


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1. Will this new private loan have a variable interest rate?

If YES, then you should know: If you refinance into a private loan with a low variable rate today, over time, the rate could rise higher than the current fixed rate on your federal loans. Variable rates are tied to an index causing the rate to rise or fall, making the total cost of variable rate debt impossible to calculate. Choosing variable rate loans means taking some financial risk. Before committing to a variable rate loan, understand how often the rate may change and how high it can rise. A low variable rate loan could be a good option IF you will fully repay the loan soon.

If NO, then you should know: Fixed-rate loans offer stability to a borrower's repayment cost, making this a good option for borrowers who don’t like risk. To accurately compare fixed-rate private loans with other loans, be sure to know the terms, conditions, and fees (e.g., origination fees) of all the loans. A fixed-rate loan may be the best option if high debt levels and long repayment terms are involved.  

2. Will you be working in public service? (This may include work during residency or a fellowship or while you are employed at an academic institution)

If YES, then you should know: After completing 10 years of public service work, while also making 120 qualifying and on time monthly payments (as well as satisfying several other requirements) forgiveness may be granted on some or all of your remaining federal student loans through the Public Service Loan Forgiveness (PSLF) program. Private loans are not eligible for PSLF. Only Direct Loans qualify for the PSLF program.

If NO, then you should know: Based on your expected career path, forfeiting access to Public Service Loan Forgiveness is not a factor you need to consider when deciding whether to refinance.

3. Will the payments be affordable and/or is postponing payments an option during residency?

If YES, then you should know: The lender determines the terms of private loans. If you cannot make your payments, you will be restricted to the options offered by the private lender. However, with federal loans, a borrower has access to a variety of affordable payment plans and postponement options. For this reason, if you refinance with a private loan, select a reputable lender, and thoroughly read the fine print.

If NO or NOT SURE, then you should know: Repaying private student loans can be burdensome if you don’t have access to the kind of flexible repayment and postponement options that federal student loans offer. So, know your current options in the federal program (such as income-driven repayment plans that limit the payment amounts and can lead to forgiveness or the ability to easily income-driven repayment plans that limit the payment amounts and can lead to forgiveness or the ability to easily postpone payments during residency) and then question the private lender to see exactly how their terms and conditions compare. In general, reputable lenders will warn you about the benefits you are giving up when refinancing federal student loans.

4. Are you comfortable with assuming more risk in your financial life?

Refinancing with a private loan may be a good option if you are highly motivated to repay your student debt; have a secure job, emergency savings, and strong credit; are unlikely to benefit from forgiveness options; have a low fixed rate option available; or if you will have access to sufficient funds soon. However, if you do not meet these criteria, many financial advisors suggest that trading in federal loans for private loans may expose you to additional financial risk. Therefore, before you assume possible financial risk, evaluate your current situation to determine whether you could afford repayment if something unexpected happens.

Federal loans will give you the ability to benefit from flexible terms and conditionsincluding access to income-driven repayment plans and possible loan forgiveness, potential interest subsidies, limits to monthly payment amounts, the availability of a death and disability discharge, and possible student loan tax deductions. Be sure the reward received in a refinance is enough to offset the potential risk.

Private debt and federal debt can operate very differently, especially when it comes to repayment. Know what you’re giving up and what you will gain because refinancing federal loans into a private loan cannot be undone.

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