Pros and Cons of Refinancing Federal Student Loans

If you have a stable income and a solid credit score, student loan refinancing can save you thousands over the life of your loan. But if you’re planning to refinance federal student loans, know that it does come with some sacrifices. Let’s take a look at the pros and cons of refinancing federal student loans.

Pros of Refinancing Federal Student Loans

• Lower Interest Rate: Refinancing can allow you to secure a lower interest rate, which can save you thousands of dollars throughout the loan repayment period. For example, if you had a $30,000 loan with an 8% interest rate, refinancing to a 5% interest rate could save you over $5,000. As of today, some federal loans have interest rates as high as 6.28%. If you have access to a cosigner or have excellent credit, you may be able to score a lower interest rate with a private lender. 

• Option to Consolidate: Refinancing gives you the opportunity to combine multiple student loans into one, simplifying your monthly payments. There are two options for consolidating federal student loans: federal Direct Consolidation Loan or private student loan refinance and consolidation.

• Longer Repayment Term & Smaller Monthly Payments: Refinancing to a loan with a longer repayment period can make your monthly payments more manageable. For instance, switching from a 10-year plan to a 15-year plan can reduce your monthly payment amount.

Cons of Refinancing Federal Student Loans

• Giving up Benefits of Federal Loans: If you refinance federal student loans with a private loan, you will lose access to federal loan benefits. These lost benefits include potential loan forgiveness, forbearance, and flexible repayment options.

• Restarting Loan Payments: If you refinance federal student loans during the forbearance period (until June 30, 2023), you will have to start making payments again.

Considerations for Refinancing

• Refinancing during forbearance: It’s possible to refinance during forbearance. However, we recommend waiting until the forbearance period ends. In doing so, you can avoid accruing interest and starting payments prematurely.

• Will Biden Extend the Student Loan Forbearance? While President Biden has extended federal student loan forbearance in the past, there’s no guarantee it will happen again. We recommend waiting until the forbearance is completely over (June 30, 2023) before refinancing. Doing so minimizes the risk of missing out on an extension.

Best Student Loan Refinance Lenders

If you decide to refinance your federal student loans, there are a variety of lenders ready to help you through the process. The following are the best lenders to refinance your student loan.

Final Thoughts from the Nest

Refinancing your student loans can save you quite a bit over the life of your loan. But if you have federal student loans, you may want to hold off to maintain your federal loan benefits.

If you’ve weighed the pros and cons and decided it is the right option for you, start the process of refinancing student loans with Sparrow. 

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