Should I refinance my federal student loans?

Here are five questions to help you decide if you should refinance your federal student loans. (iStock)

Student loan refinancing combines all of your loans into one and could help you get a better rate and pay off your college debt sooner. But while it may be tempting to refinance to a lower interest rate, it isn’t always the best move for borrowers.

With federal student loan assistance rolled into COVID-19 relief bills and upcoming legislation expected to forgive some federal student loans, there’s even more to consider.

The questions below will help you determine if you should or shouldn’t refinance your federal student loans.

  1. What type of loans do you have — federal or private?
  2. How long are student loan payments paused?
  3. Are you a public service worker?
  4. Do you have a stable income?
  5. Do you qualify for President Biden’s student loan forgiveness plan?

If you have a steady stream of income and a decent credit score, refinancing your private student loans could be a smart strategy. An online tool like Credible can be handy for comparing student loan refinancing rates from multiple lenders without affecting your credit score.

1. What type of loans do you have — federal or private?

Federal and private loans come with completely different loan terms, rates and timelines, which may change when you refinance. 

Federal borrowers should hold off on refinancing in most cases because federal loans come with:

  • Lower payments and interest
  • Grace periods
  • Forbearances
  • Income-driven repayment options
  • Forgiveness for qualifying loans

While private lenders may offer some flexibility, they don’t guarantee all the benefits above. Private borrowers should think about student loan refinance to save money on interest and simplify their repayment plan.

You can use an online tool like Credible to view a rates table that compares rates from multiple lenders at once​.


2. How long are student loan payments paused?

Borrowers with federal loans should also pump the brakes on refinancing due to the current pause on payments.

Beginning with the CARES Act last March, student loans owned by the Department of Education have:

  • 0% interest
  • No required payments
  • No collections on defaulted loans

In January, President Biden issued an executive order that extended this forbearance through September 30, 2021.

While a private lender might offer a competitive interest rate on a consolidated loan, it won’t be 0%. As long as the forbearance is in effect, you’re better off sticking with your federal loan.


3. Are you a public service worker?

If you’re a public service worker, you should also skip out on refinancing your federal student loans.

The Public Service Loan Forgiveness Program will forgive the balance on your Direct Loans if you meet the following criteria:

  • Work full-time for the government or a non-profit
  • Are on an income-driven repayment plan
  • Have made 120 qualifying payments

While Perkins and FFEL Loans do not qualify, they can be merged into an eligible Direct Consolidation Loan.

Likewise, teachers who serve in low-income schools for at least five years are eligible for up to $17,500 of school loan forgiveness on Direct and FFEL Loans.

4. Do you have a stable income?

If you’re at risk of losing your job in the coming months or have an unsteady income, refinancing is a no-go.

When you experience a job change or an unexpected crisis hits, you can opt for student loan forbearance or an income-driven repayment plan with federal loans.

While some private lenders offer emergency forbearance, it isn’t likely to provide as much relief. This is especially true during the pandemic. With the current freeze on interest and payments, you’re better off staying put for now. 

5. Do you qualify for President Biden’s student loan forgiveness plan?

President Biden has proposed forgiving $10,000 of federal student loans per borrower, with Sens. Chuck Schumer and Elizabeth Warren calling for $50,000.

While many details are unknown, some level of forgiveness is expected. What’s certain is that federal loans — not private ones — will be eligible, another reason to hold off on refinancing federal loans for now.

If you have private student loans, there’s no reason to wait to see how legislation plays out. Use an ​online student loan refinancing calculator​ to get a sense of what your new monthly payments could be.


Bottom line

The pros of federal student loans typically outweigh the cons. While you may find comparable interest rates from a private lender, the repayment options probably won’t be as flexible.

That fact is on full display now with the total suspension of payments and interest. If you have a federal student loan, your best move is to make the most of the COVID-19 relief benefits and pay down your principal. In the coming months, some or all of your student loan debt may be wiped out.

If any of your loans are private, use an online tool like ​Credible to compare student loan refinancing rates from multiple lenders at once without affecting your credit score.