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Posted 11 May 2023

Refinancing Federal Student Loans: What to Know

Refinancing your student loans means you’re taking out a new loan with a private lender to pay off a portion or the entirety of your student loan debt. This has the potential to change your lender, the loan’s interest rates, and repayment term.

Why People Refinance

Often, people consider refinancing their student loans to save money or to combine several different student loan payments into one. Saving money is typically accomplished when you’re able to obtain a lower interest rate, meaning you’ll pay less over the life of your loan. Another way to lower payments is by extending the term of your loan, allowing you to lower your monthly payments.

While combining payments, lowering your interest rate, or extending the term sound like they could be helpful, refinancing federal student loans removes several of the perks associated with the loans, as refinancing means moving them to a new lender, making them private student loans. Keep in mind there are other options to explore to lower a monthly payment or consolidate payments on federal student loans discussed below.

Income-driven Repayment Plans

Income-driven repayment plans are only offered on federal student loans and help lower your loan payments to an affordable amount based on both your income and family size. There is an application that must be reviewed for this option, then payments are typically adjusted to 10-20% of your discretionary income depending on the type of payment plan you receive. There are four different options your student loan servicer can help you review to see what would best for your situation:

  • Revised Pay As You Earn Plan (REPAYE Plan)
  • Pay As You Earn Plan (PAYE Plan)
  • Income-Based Repayment Plan (IBR Plan)
  • Income-Contingent Repayment Plan (ICR Plan)

Public Service Loan Forgiveness

Public Service Loan Forgiveness programs forgive your remaining student loan balance after meeting strict eligibility requirements and making 10 years of qualifying payments. Only Direct and Direct Consolidation Loans are eligible, and additional requirements include working full time with an eligible employer (U.S. government organizations and not-for-profit organizations with a valid 501(c)(3) status from the IRS) and enrollment in an income-driven repayment plan. It’s important to do your research and stay in touch with your provider to ensure you remain eligible if you’re planning to use this program.

Loan Deferment or Forbearance

Deferment and forbearance are options offered on federal student loans allowing a temporary hold on the payment requirement. Loans may go into forbearance or be deferred if you are unemployed, enrolled at least part-time in school, are serving in active duty, or in special circumstances such as the recent student loan payment pause from the government during COVID-19. If federal student loans are refinanced and turned into private student loans, you may be able to apply for a hardship program to pause payments but will no longer be able to have loans go into forbearance or deferment.

Direct Consolidation Loan

It can be challenging to make several different student loan payments each month. However, you can consolidate federal student loan payments without refinancing, resulting in the loss of some of the options listed above. Consolidating your loans doesn’t change the rate but allows you to combine multiple federal student loans into one Direct Consolidation Loan with a weighted average interest rate.


©2023 Reseda Group LLC, used under license.