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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.

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Select’s editorial team works independently to review financial products and write articles we think our readers will find useful. We earn a commission from affiliate partners on many offers, but not all offers on Select are from affiliate partners.

Refinancing your student loans is an effective way to simplify your finances by combing 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 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 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, if the Biden administration does end up moving forward with any type of widespread student loan forgiveness, borrowers who chose to refinance with a private lender will no long qualify for cancellation.

Consider a private lender that offers their own protections

With federal student loan payments and interest on pause through September 2021, 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

  • Cost

    No origination fees to refinance

  • Eligible loans

    Federal, private, graduate and undergraduate loans, Parent PLUS loans, medical and dental residency loans

  • Loan types

    Variable and fixed

  • Variable rates (APR)

    From 2.24%; from 2.37% for medical/dental residents (rates include a 0.25% autopay discount)

  • Fixed rates (APR)

    From 2.99%; from 3.12% for medical/dental residents (rates include a 0.25% autopay discount)

  • Loan terms

    5, 7, 10, 15, 20 years

  • Loan amounts

    From $5,000; over $10,000 for medical/dental residency loans

  • Minimum credit score


  • Minimum income


  • Allow for a co-signer


Terms apply.

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.

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. Now is a good time to take advantage of the historically low rates before they go up again.

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.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.