Federal Refinance Program
Over the past several years, more student loan borrowers are finding themselves buried under overwhelming student loan debt.
As student loan debt has turned into a full-fledged crisis, student loan refinancing companies have emerged to provide relief to student loan borrowers. These student loan refinancing companies — which are private lenders, unrelated to the state or federal government — offer a solution to student loan borrowers looking to lower their high interest rates and make student loan payments more manageable.
Through student loan refinancing, borrowers can refinance high-interest student loan debt and potentially score a lower rate, saving thousands of dollars in interest over time. Those savings can then go toward extra payments to get out of debt even faster. Additionally, borrowers can select a longer term to obtain a lower monthly payment as well.
3 Questions to Determine if Refinancing Federal Student Loans is Right For You
While refinancing can be a major financial improvement to those who qualify, there’s one (big) caveat.
When you refinance your federal student loans with a private lender, you forfeit most federal student loan protections. Student loan refinance companies can refinance both federal and private student loans, but given this one potential issue, many borrowers often ask us: Should I refinance my federal student loans?
Read on for tips and tricks to help you decide.
1. How much money can you save by refinancing federal student loans?
When you refinance federal student loans, you give up benefits such as income-driven repayment plans and loan forgiveness, so it’s important to analyze if the risk/reward of refinancing makes sense.
Refinancing your federal student loans can get you a better interest rate, and save you money, but how much you will actually save by refinancing? Be sure to run the numbers with our student loan refinancing calculator.
Student loans most likely to benefit from refinancing include Grad PLUS and Parent PLUS loans, which bear relatively high interest rates ranging from 6% – 9% depending on the year you obtained them.
Most student loan refinancing companies allow you to check your prospective rate before filling out a full application. Checking your interest rate will typically result in a “soft” credit pull and won’t affect your credit score. This lets you shop for the best interest rate and calculate how much you’ll save without hurting your credit.
2. Do you plan on using any federal repayment options?
The federal government has created several income-driven repayment plans, which lower monthly payments, to make repayment more manageable for federal student loan borrowers. These programs include Income-Based Repayment (IBR), Income-Contingent Repayment (ICR), Pay As You Earn (PAYE), and the Revised Pay As You Earn (REPAYE) plan.
Some of these plans are need-based and only available to certain eligible borrowers. Others are available to most federal student loan borrowers. While there are definite downsides to an income-driven plan (such as paying more in interest or getting hit with a tax bill after loan forgiveness), these plans can be a lifesaver if you lose your job, experience economic hardship, or simply need the lowest possible payment.
In addition, if you work as a federal employee or for a specific not-for-profit employer, such as a teachers, lawyers, or doctors, you may be eligible for student loan forgiveness after making consistent payments over a set period of time. By opting to refinance your federal student loans, you are no longer eligible for any of these repayment plans or loan forgiveness programs through the federal government.
If you have a high debt load, it is usually a safer bet to keep your federal loans, along with the option to apply for alternative repayment plans if needed.
If you are confident in your ability to repay your loans over your given repayment term and are seeking to maximize savings, and you also have a good credit score and healthy income, refinancing your federal loans could be a wise option.
3. What are the potential new repayment terms from refinancing?
If you’re thinking of refinancing your federal student loans, it’s crucial to compare your repayment terms. Be sure to look at your:
- Repayment period (or how long you will be paying your loans)
- Interest rate
- Monthly payment
For federal student loans, you can have anywhere from 10 to 30 years (for consolidated loans) to repay your loans. Refinancing companies typically offer repayment terms ranging from 5 to 20 years.
Also note that federal loans are fixed-rate loans and guaranteed to maintain the same interest rate during repayment.
Private lenders, on the other hand, offer both fixed and variable interest rates. These options can either hurt you or help you, depending on current and future interest rate market conditions. It is typically a safer bet to choose a fixed-rate loan, but you can also realize additional interest savings with a variable rate loan in a low interest rate market.
If you do choose to refinance your federal student loans, understand what impact it may have on your monthly payment as well. You’ll want to do a side-by-side comparison of your repayment terms to understand if refinancing will truly benefit you in the end.
Student Loan Hero Recommends:
Deciding to refinance your federal student loans can be a big decision. There’s no doubt that refinancing can be helpful for private student loan borrowers, but given the repayment flexibility and loan forgiveness options the federal government provides, it’s a tougher decision to make regarding federal student loans.
So what do we recommend? If you recently graduated, are underemployed, or thinking of changing jobs, we recommend keeping your existing federal loans due to the generous repayment options available until you stabilize your employment situation.
However, If you are in a comfortable and secure financial and employment position, have good credit, and are seeking to eliminate your student loan debt as fast as possible, we recommend examining refinancing as a viable option.
Interested in refinancing student loans?Here are the top 6 lenders of 2016! Advertiser Disclosure
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