Should I Refinance My Federal Student Loans?

Answer these questions to reveal if refinancing would benefit your debt situation.
If you have excellent credit, you may be able to refinance your existing federal student loans into a private loan. Before doing so, it is important to understand the full impact of making this permanent change to your loans.

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 - this makes the total cost of variable rate debt impossible  to calculate. Choosing variable rate loans involves taking some financial risk.  Before committing to a variable rate loan, understand exactly how often the rate may change and how high it may rise.  A variable rate loan could be a good option IF full repayment will occur in the near future.

If NO, then you should know: Fixed rate loans offer stability to a borrower's repayment, making this a good option for borrowers opposed to risk.  When comparing fixed rate private loans against other loans, be sure to know the terms, conditions, and fees (i.e. - origination fees) of all the loans for an accurate evaluation.  A fixed rate loan may be the best option if high levels of debt and long repayment terms are involved.  

2. Will you be working in public service? (This may include work during residency, fellowship and/or in an academic institution)

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

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

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

If YES, then you should know: The terms of private loans are up to the discretion of the lender. If payments become unaffordable, you will be restricted to the accommodations offered by the 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: Repayment can be burdensome to private student loan borrowers if they 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 monthly 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. Which borrowers are best served by refinancing?

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; if you are unlikely to benefit from forgiveness options and have a low fixed rate option available, OR if you will have access to sufficient funds in the near future.  

Federal loans are best if you will benefit from their flexible terms and conditions including 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, possible student loan tax deductions, and more. 

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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