The federal government originates the vast majority of student loans. There’s currently an incredible $1.6 trillion worth of student loans in the government’s portfolio. While there are all kinds of inferences that can be made from this, for borrowers, the most important thing is being able to pay off their debt. Many will look at refinancing as a potential option. Does it make sense to refinance federal student loans?
What Does It Mean to Refinance Student Loans?
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Refinancing is a super common way for consumers to improve their relationship with debt. In fact, the general concept of refinancing is one of the most popular ways for individuals and businesses to get a more attractive loan.
So, what is refinancing, you ask? It’s simple. Refinancing is just getting a new loan that is used to totally replace an old one. This can be done through the same lender or a new one. Either way, refinancing can be a means for reducing the amount you’ll have to pay back on your loan over time.
By refinancing your debt, you can change elements of your loans like the interest rate or the repayment term. This can be hugely beneficia to those who have a high interest rate or want to lengthen or shorten their loan’s length.
While there are definitely people who will benefit from refinancing their student loans, not all will fall into this category. There are a few nuances that pertain specifically to student loan refinancing that make it a little different than other types. It’s essential to understand these before deciding to refinance student loans.
Does It Make Sense to Refinance Federal Student Loans?
You must know your own financial situation, as well as some of the intricacies of refinancing student loans, in order to determine if refinancing your federal student loans is the right call. These are a few of the top things to think about when deciding on whether to refinance your federal student loans:
- You can only refinance with a private lender – While some people might conflate debt refinancing and consolidation, these are separate, albeit related, terms. A student loan refinance can only be done through a private lender. Although there’s nothing wrong with getting a loan from a private lender, this has massive implications for those who have federal student loans. Federal loans come with highly desirable protections like income-driven repayment plans and potential forbearance. If you refinance your federal student loans, you’ll lose these benefits. This is a really important thing to think about before you go through with refinancing.
- Consolidation might work for you – If you have federal loans, you should see if a Direct Consolidation Loan will meet your needs. When you consolidate with the federal government, you’re going to be combining several of your loans into a single new one. This can help simplify your loan repayment since you only have to focus on one bill instead of many. Furthermore, it’s possible to alter the repayment term of the loan, which can lower your monthly payments. It’s important to note though, that you can only lower your interest rates by refinancing or consolidating with a private lender. While you’ll hold onto your federal loan protections when you consolidate with the federal government, it can actually lead to you paying more over time. This is because interest continually accrues on your current principal balance. If you’re taking longer to pay this down, with the same interest rate, you’re going to be paying back more.
- Determine the desirability of your federal loans – Not all federal loans are the same. Some come with much lower interest rates than others. If you have a Direct PLUS Loan from the government, you might find refinancing with a private lender to be more aligned with your financial best interests. These loans typically come with much higher rates, which can be greatly reduced by refinancing when interest rates are low.
Depending on your situation, it can be tough to know whether refinancing your federal loans is the right call. For most people, it probably makes sense to shy on the side of caution here, especially if you plan to utilize federal repayment plans. At the same time, locking in a low fixed rate with a private lender can potentially save borrowers thousands over course of loan repayment. Only you can determine what makes most sense for someone in your shoes.