Understanding the basics
For student loans, the vast majority of borrowers wonder if they can refinance their federal loans in order to receive a better interest rate. The quick answer is not necessarily through the federal government. Federal loans have no refinancing option that lowers your rate. What you can do is consolidate your federal loans into a single Direct Consolidation Loan or refinance with a private lender. Both alternatives have significantly different results, so it is more advisable to know both of them prior to your decision.
Federal student loan consolidation
In case you have federal student loans, you can consolidate them into a single new loan called a Direct Consolidation Loan. This is simpler to repay since you will only make a single monthly payment rather than many.
But the rate on this new loan is not lower. Rather, it’s the weighted average of all of your existing rates, bumped up a bit. So, consolidation won’t save you interest, but it can simplify paying your bills.
The huge plus of maintaining your loans as federal is that you remain eligible for benefits such as:
- Income-Driven Repayment (IDR) plans reduce payments based on income.
- Public Service Loan Forgiveness (Cancellation), which wipes out the balance after 10 years of qualifying payments if you work in public service.
- Deferment and forbearance options are available if you run into financial trouble.
- Consolidation is best for those who desire convenience without giving up federal benefits, not cutting rates.
Refinancing with a private lender
If you actually wish to lower your interest rate, that can only be done by refinancing your federal loans into a new private loan. Private institutions and banks can give you a lower rate, especially if your credit is good and your income stable.
Refinancing can benefit you:
- By paying less interest over the long term.
- By reducing your monthly payment.
- Switch from a variable to a fixed rate for certainty.
But rolling over federal loans into a private loan has significant disadvantages. You forfeit federal protections permanently, including IDR plans, PSLF, and forgiveness benefits in cases of disability or death.
This is a good option for borrowers who are in good financial health, not reliant on federal payment programmes, and confident they can manage private loan terms.
Should you consolidate federal loans into a private loan?
It’s easy for most to roll all their student loans, federal and private, into one private loan for ease. While it is easier, the move is risky. Federal loans come with benefits that private loans simply cannot provide. When you refinance to a private loan, it cannot be undone.
If you’re a public service worker or someone who may need income-driven payments in the future, it’s usually best to avoid refinancing federal loans.
Using a home equity loan for student debt
Another option borrowers consider is borrowing with a home equity loan or home equity line of credit (HELOC) to fund their student loans. Although it can result in a lower interest rate, it also makes your student debt secured on your house. You may lose your house if you fall behind on payments.
This would be appealing to high-saving and stable-income borrowers, but it is a risky move as far as remaining with student loan products is concerned.
More student loan news
Student loan borrowers face growing delinquency crisis as situation turns urgent
What does forbearance mean with Student Loans and how does it work?
How do I apply for student loan forgiveness under PSLF?
Major student loan change as Department of Education looks to transfer loans “in months”
What is the difference between total and partial student loan forgiveness?
What are the eligibility criteria for Public Service Loan Forgiveness (PSLF)?
