What to watch out for when refinancing federal student loans
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Refinancing your student loans is an effective way to simplify your finances by consolidating your various monthly payments into one new monthly bill with one lender.
Those who qualify for refinance can also shorten or lengthen their loan repayment term depending on what works best for their finances, and they can get a lower interest rate to boot.
It’s too good to be true? For federal student loan borrowers in particular, there is a catch.
For borrowers who have loans held by the US Department of Education, the only option is to refinance through a private lender, such as a large bank, credit union, or online lender. The government does not offer refinancing options, just a Direct consolidation loan program.
Once a federal student loan borrower exchanges their loans for a loan refinanced through a private lender, they lose all federal protections they once had.
If you are a federal borrower, you need to know ahead of time what you will be missing out on by switching to a private company. These unique government protections in place for federal borrowers provide peace of mind you may not want to give up – including the federal student loan freeze that is in place until September 2021 and an interest rate current of 0%.
Here are some of the additional protections:
- Deferral and forbearance for up to three years (and with subsidized federal loans, you are not charged interest during the deferral)
- Access to income-based repayment plans that recalculate your monthly bill based on any change in income
- Forgiveness programs for certain jobs through Public Service Loan Forgiveness (PSLF) and Teacher loan forgiveness
Additionally, if the Biden administration does eventually go ahead with any kind of widespread student loan forgiveness, borrowers who have chosen to refinance with a private lender will no longer be eligible for cancellation.
Think of a private lender who offers their own protections
With federal student loan payments and interest on hold until September 2021, now is not the time to refinance federal loans. However, when this Covid-related postponement period ends and if you want to try and lock in a lower interest rate through refinancing, be aware that some private lenders have their own payment protections for borrowers. These protections won’t be as extensive as what you would get with federal loans, but at least it’s a form of collateral.
The protections may include a stay in the event of unemployment or economic hardship, as well as the ability to make interest payments only before the start of the repayment period.
Refinancing SoFi Student Loans, for example, offers borrowers the following:
- Unemployment protection (abstention offered in three-month increments, capped at 12 months)
- Withholding of Covid payments for at least 90 days, in the event of financial difficulties
- Postponement of the loan, if back to school
- First six months of pre-existing grace period on loans that wish to be refinanced
No origination fees to refinance
Federal, private, graduate and undergraduate loans, Parent PLUS loans, medical and dental residency loans
Types of loans
Variable rates (APR)
From 2.24%; from 2.37% for residents in medicine / dentistry (rates include a 0.25% discount on automatic payment)
Fixed rates (APR)
From 2.99%; from 3.12% for residents in medicine / dentistry (rates include a 0.25% discount on automatic payment)
From $ 5,000; over $ 10,000 for medical / dental residency loans
Minimum credit score
Authorize a co-signer
For borrowers with federal and private student loans
While you should delay refinancing your federal student loans during their current payment suspension, the opposite is true for your private student loans.
Private student loans are not part of the Covid-induced forbearance, your monthly payments are still due, and interest has continued to accrue. For this reason, you may want to consider refinancing only your private student loans if your interest rate is high or if your your credit rating has improved since you first took out the loan. Now is the time to take advantage of historically low rates before they rise again.
Whether or not you choose to refinance today, be aware that many private lenders have implemented some kind of payment relief for borrowers facing financial difficulties. Be sure to ask your specific lender if they offer help at this time and how you qualify.
Editorial note: The opinions, analyzes, criticisms or recommendations expressed in this article are those of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.