Refinancing Federal Student Loans: Interest Rates and How to Do It

Written by: Kristyn Pilgrim
Updated: 12/20/19

While you’ll still owe the same principal amount, you can simplify the repayment process by refinancing your federal student loans. Bundle them into one package with a private lender, and you’ll have just one payment to make every month.

For some students, refinancing federal student loans makes a lot of sense. But for others, it’s a financial mistake. Stepping away from the protections that come with federal student loans could cost you a lot in the future. 

In this article, we’ll explain:

  • Why you should keep your federal student loans
  • When refinancing federal student loans makes sense
  • What options you have in the private student loan market
  • What to try if refinancing isn’t right for you

Why Not Refinance Federal Student Loans?

No one likes looking at a big loan balance. Private refinancing can entice you with plenty of perks and favorable terms. But never forget that federal student loans come with benefits the private sector just can’t match. 

Your federal student loan is serviced by a bank (like Sallie Mae), but the loan terms are set by government officials. 

Federal student loan benefits include:

  • Subsidies. While you’re in school, and during other parts of your life, the government may pick up your interest costs, but this quite uncommon. No private student loans offer this benefit.
  • No credit checks. No one needs to look at your credit history before handing out a federal loan. Private companies can, and often do, demand high scores before they’ll work with you. 
  • Deferment and forbearance. If you’re struggling to pay back your debts, you can sometimes pause your payments. A private bank or credit union may not give you that choice. 
  • Plenty of repayment plans. You can tie your payments to your income and more. You can move from option to option, depending on your financial health. Your private loan will  not be so flexible. 
  • Public service loan forgiveness. Work in a few specific areas of public service, and you could be eligible to walk away from your debt. That’s not something common in the private loan sector. 

Transfer your federal student loans to a private lender, and you could lose access to these benefits. And when they’re gone, you can’t get them back. The government doesn’t allow you to refinance loans or correct a mistake. 

A smarter option for some people might be loan consolidation. A direct consolidation loan from the U.S. Department of Education lets you put all your federal loans into one package. You’ll have a sole payment to make each month, and you won’t lose all the benefits of federal products. 

When Student Loan Refinancing Is Smart 

You’ve probably seen blog posts that claim refinancing federal student loans is never a good idea. That’s not always true. For some students, moving from federal programs to private versions is the best way to ensure financial health. 

It’s not uncommon for students to owe money to about four or five lenders by the time graduation arrives, experts say. You could have a mix of federal and private loans, and all of them demand your money. If you find it hard to make payments, you could:

  • Incur fees. Miss payments and you could get dinged with fees. 
  • Risk your credit score. Every missed payment suggests you’re not fiscally responsible. And showing fiscal irresponsibility could worsen your credit score.
  • Feel stressed. Did you make every payment on time? Did you miss one? These thoughts could keep you up at night. 

Federal student loan borrowers have protections. But, experts say, what seems like a perk could be a weapon in disguise. For example, if you switch between repayment plans often, you could sink further into debt. Some don’t cover the cost of interest, so every month, your balance rises. 

Crunch the numbers and determine how much refinancing will cost you during the life of the loan. You might find that you’ll save a significant amount of money. You might also benefit from a lower monthly payment when you refinance, which could help you stick to your budget. However, a lower monthly payment is achieved by lowering the interest rate or by extending the length of payment. If you do decide to extend the payment process, though, you’ll incur greater interest charges over time.

Experts say federal student loan refinancing makes sense for people with:

  • Secure jobs. If you know you’ll have a paycheck during the life of the loan, you can more easily walk away from forbearance protections. 
  • Emergency savings. Your bank balance could save you if something catastrophic happens. You won’t need government protection. 
  • Strong credit. To qualify to refinance a student loan with a private lender, you’ll have to have strong credit and a low debt-to-income ratio.

Private Companies That Refinance Federal Student Loans 

You’ve decided that it’s smart to move away from a federal product. Where should you look for the right loan? There are plenty of organizations that are ready and willing to work with you. 

This is a sample of companies that offer federal student loan refinancing options:

  • Wells Fargo: Work with this company to consolidate all your loans, or refinance just one and leave the others alone. Choose a fixed interest rate, and you’ll pay between 3.5% APR and 9.49% APR. A variable rate moves between 3.99% APR and 9.99% APR to start. Repay the loan between five and 20 years, depending on the size of your balance.

    You might need a co-signer to qualify. Co-signer release is available, but the company offers no terms and conditions about that option.
  • SoFi: Apply online in minutes, and find out whether you qualify. If you do, you’ll get access to benefits like financial planning. You’ll pay nothing for your application or paying off your balance early.

    The company doesn’t publish interest rate ranges, which can make shopping a little tricky. You’ll need to give them data before they tell you your price.
  • Citizens Bank: Interest rates start at 2.25% APR and move up, depending on whether you use a fixed rate or variable rate program. Your credit score also plays a role. Pay back the balance in five to 20 years, and you select the terms.

    Bundle all your loans into one to save time, or refinance just the one that bothers you most. You’ll need at least $10,000 in loans to use this lender.
  • PenFed Credit Union: Stick with a smaller company, and you could get a better deal. You’ll pay an interest rate starting at 3.48% APR. The cost increases if you have poor credit or want a fixed rate. Pay back the balance in five to 15 years.

    You must have a graduate degree or higher to work with this company, and you must meet credit requirements. You might need a co-signer. 

What Else Can You Try?

You’ve crunched the data. You’ve considered private student loan consolidation, and you don’t think it’s right for you. Don’t stick with a federal loan payment that hurts your budget. Take advantage of the options open to you. 

To make your student loan payments manageable:

  • Enroll in an income-driven repayment plan. Offer information about how much you make each month. Your monthly payment should fit within your budget. And when you get back on your feet and make more money, switch to a different program with a higher payment.
  • Apply for student loan forgiveness, cancellation, or discharge. If you’re really struggling with your financial situation and you meet core requirements, the government can help you. You could get the balance wiped away entirely.

Look for ways to pay more. You won’t get hit with fees if you pay off your balance early. The bigger your monthly payment, the quicker you’ll be done with the loan.