Credible takeaways
- Refinancing lowered my student loan interest rates and simplified my payments, though I sacrificed federal benefits like repayment flexibility and forgiveness.
- I refinanced because I was confident in my financial stability and didn't foresee needing federal loan benefits.
- This strategy reduced my monthly payments, consolidated my debts, and improved my experience with customer service.
- Evaluating your future financial needs and the likelihood of requiring federal protections is crucial before deciding to refinance federal student loans.
Refinancing student loans involves taking out a new loan and using it to pay off existing educational debt. You can only get this new loan from a private student loan lender, so most experts advise against refinancing federal student loans.
“It's important to note that federal student loans have protections and opportunities for forgiveness in the future,” advises Doug Roller, an investment adviser representative and owner of Crossroads Financial Group. “Private student loans will not have the same protections.”
Even though this is the case, I refinanced a substantial amount of federal student loan debt more than a decade ago — and I have never once, for a second, experienced any regret about doing so.
Here's why refinancing my federal loans was the right choice for me — and some tips for deciding if it could work for you, too.
Why I refinanced my federal student loans
In 2012, I refinanced tens of thousands of dollars of federal student loans that I used to help pay for law school. They were all Direct Unsubsidized Loans, so I had no interest subsidies on the money that I owed. I had consolidated my loans from my years in school, and my rate was fixed at 6.80%.
I had excellent credit when I refinanced, so I could qualify for a refinance loan at a 3.25% rate. This was obviously a huge drop in the rate I was paying, since I was able to cut my interest costs in half.
“Refinancing federal loans can make sense if there is a large enough discrepancy between the federal loan rate and the private loan rate,” explains Clifford C. Cornell, a Certified Financial Planner (CFP) and associate financial adviser and Bone Fide Wealth, LLC.
That was certainly the case in my situation, and since I owed a lot of money, the interest savings were worth hundreds of dollars.
Refinancing brought me many benefits beyond just a lower rate
The interest rate change alone was a great reason for me to refinance. But there were other benefits as well. Specifically, I was able to include some private student loans in my refinance loan as well. Because of this, refinancing:
- Significantly lowered the interest rate that I was paying on all of my student loan debt
- Enabled me to make just one monthly payment instead of multiple payments to different lenders
- Allowed me to sever ties with my federal student loan servicer, which I didn't think provided me with very good customer service
My monthly payment also ended up being lower as a result of my low rate and the fact that I was paying just one lender. While this wasn't a huge concern for me because I intended to pay more than the minimum each month to fully repay my debt faster, the lower payment did provide more flexibility in my monthly budget since I didn't have to pay extra if I didn't want to.
The downsides of refinancing weren't a big deal to me
There were obvious upsides to refinancing in my case. However, despite these benefits, there are circumstances where refinancing would not have made sense.
“You must look at the potential savings versus the potential loss of benefits that a federal student loan has,” advises Domenick D'andrea, a financial adviser and founder of DanDarah Wealth Management. “If you think that you may qualify for loan forgiveness, this could outweigh interest savings, and it would make sense to keep your loans as is.”
Cornell also warns that you lose access to income-driven repayment plans when you switch from a federal student loan to a private refinance loan.
Loan forgiveness is almost never an option with private student loan lenders, nor is making payments based on income.
With federal loans, however, forgiveness can be an option after a certain number of payments on an income-driven plan or after you make a certain number of payments while performing public service work. It's just one of several benefits federal student loans offer that private loans don't.
Federal loans also offer more flexibility in changing payment plans, generous deferment and forbearance options, and subsidized interest for Direct Subsidized Loans during deferment periods.
Giving up these benefits can be a big deal — but it wasn't for me.
Why refinancing federal student loans had no disadvantages for me
On paper, it appeared I was giving up a lot of benefits by refinancing, but in reality, I wasn't giving up any.
I had a very stable job running my own business, and I knew I would never give up that job to do public service work, which would qualify me for Public Service Loan Forgiveness. The combined household income my husband and I earned also meant that we were very unlikely to ever take advantage of an income-driven plan. Since we were both self-employed with multiple income streams, it also seemed unlikely that deferment or forbearance would ever be needed.
The only real way we'd ever not pay off my student loans in full would be in the event of a major disability that impacted my work abilities — and the private student loan I refinanced into offered disability discharge.
Since there was no chance I'd take advantage of the unique benefits federal loans provided, I did not lose anything by refinancing. I gained the ability to reduce my rate and payments so more of my money went toward reducing the balance. I also had more budget flexibility — and I lost nothing at all.
Current student loan refinancing rates
Is refinancing federal student loans right for you?
As a general rule of thumb, you shouldn't refinance federal student loans into private ones if there is any chance you will take advantage of:
- Loan forgiveness
- Income-driven plans
- Generous forbearance and deferment options
- Broad government forgiveness of student loans that future administrations could make possible
However, if you're confident in your continued earning power and don't think you'd ever qualify for forgiveness, refinancing could make sense if you can significantly reduce your interest rate. Just be sure your new private student loan offers some protection in case of disability, and carefully consider the future to ensure your circumstances aren't likely to change.
I took advantage of my low rate to pay off my debt just a few years after refinancing. During that time, I was right that I wouldn't have used any of the federal borrower benefits. I have no regrets about refinancing student loans, and I would make the same decision again in a heartbeat since it helped me become debt-free.
