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Here's the catch when refinancing your federal student loans
Refinancing federal student loans may get you a lower interest rate, but you'll lose protections.
Editor's Note: This post was updated to reflect President Biden enacting federal student loan forgiveness on Aug. 24, 2022.
Refinancing your student loans is an effective way to simplify your finances by combining your various monthly payments into one new monthly bill with just one lender.
Those who qualify for refinancing are also able to shorten or lengthen their loan repayment term according to what works best for their finances, and they may score a lower interest rate to boot.
Sound too good to be true? For federal student loan borrowers specifically, there is a catch.
For borrowers who have loans that are owned by the U.S. Department of Education, the only option is to refinance through a private lender, like a big bank, credit union or online lender. The government does not 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 need to be aware ahead of time what you will 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 may not be willing to give up — most notably the federal student loan freeze that's currently in place through December 2022 and a current interest rate of 0%.
Here are some of the additional protections:
- Deferment and forbearance for up to three 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 certain jobs through Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness
Plus, since the Biden administration has moved forward with widespread student loan forgiveness, borrowers who choose to refinance with a private lender will no long qualify for cancellation.
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Consider a private lender that offers their own protections
With federal student loan payments and interest currently on pause through December 2022, now is not the time to be refinancing federal loans. However, when this Covid-related postponement period ends and if you want to try locking in a lower interest rate through refinancing, know that there are some private lenders that have their own payment protections for borrowers. These protections won't be as extensive as what you would receive with federal loans, but at least it's some form of security.
Protections may include deferment in the case of unemployment or economic hardship, as well as the option to make interest-only payments before your repayment term begins.
SoFi Student Loan Refinancing, for example, offers borrowers the following:
- Unemployment protection (forbearance offered in three-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 school
- First six months of pre-existing grace period on loans looking to be refinanced
SoFi Student Loan Refinancing
No origination fees to refinance
Federal, private, graduate and undergraduate loans, Parent PLUS loans, medical and dental residency loans
Variable and fixed
Variable rates (APR)
5.74% - 9.99% (rates include a 0.25% autopay discount)
Fixed rates (APR)
4.99% - 9.99% (rates include a 0.25% autopay discount)
5, 7, 10, 15, 20 years
From $5,000; over $10,000 for medical/dental residency loans
Minimum credit score
Allow for a co-signer
For borrowers with both federal and private student loans
While you should hold off on refinancing your federal student loans during their current payment suspension, the opposite is true for your private student loans.
Since private student loans are not a part of the Covid-induced forbearance, your monthly payments are still due and interest has continued to accrue. For this reason, you may want to consider refinancing just your private student loans if your interest rate is high, or if your credit score has improved since you first took out the loan.
Regardless of whether you choose to refinance today, know that many private lenders have put into place some sort of payment relief for borrowers experiencing financial hardship. Make sure to ask your specific lender if they are offering any assistance at this time and how to qualify.
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