Getting accepted to college is an exhilarating milestone—it's when big dreams start to take shape. But once the excitement settles, the reality of college costs can quickly set in.
For many students, paying for school often means taking out student loans. The U.S. Department of Education is the main source for these loans. After filling out the FAFSA® (Free Application for Federal Student Aid) to explore financial aid options, most students decide to accept the federal loans they’re offered.
The interest rates on federal student loans are non-negotiable, as they are set by Congress. Students must accept the approved rate for each academic year they borrow (repeating the process annually throughout their education). Upon graduating from college (including a 6-month grace period), the first monthly student loan payments become due.
If not managed carefully, federal student loan borrowers may be taken aback by the amount of debt accumulated while pursuing their education. If you find yourself in this situation, don't worry. There are options available, such as income-driven repayment, student loan forgiveness, loan consolidation, or even refinancing.
What is Student Loan Refinancing
Student loan refinancing is when you take your loan(s) and go to a private lender to change the terms of your loan and/or lower your interest rate. Effectively, you will borrow the same amount you owe (to be used to pay off your existing loans) with the new loan offering potentially more favorable terms, such a lower interest rate or lower monthly payments due to a longer repayment period.
You may opt for student loan refinancing for a variety of reasons. You may simply want to save money. With the given rates by the government at the time of your schooling, you may find that the market is offering more favorable rates now that will translate into quite a bit of savings over the life of your loan.
If you find your struggling to make your student loans payments and want to act while your credit is still good, a student loan refinance might be just the solution. Changing the repayment terms by lengthening the life of the loan could lower your payments and make them more manageable preserving your credit score and the credit you’ve worked hard to build up to this point.
To be clear, the federal government is not a private lender and will not “refinance” your federal student loans. Going this route will move your loans from the protections and benefits offered by the Department of Education and move them to a private lender, making them now private student loans.
The federal government while not budging on interest rates, does offer you a number of options if you find yourself struggling with your loans. These include income-driven repayment plans, Public Service Loan Forgiveness (PSLF) and Federal Direct Consolidation loans.
U.S. Department of Education Options for Federal Student Loans
Income-Driven Repayment Plans
The federal government offers 4 different Income-Driven Repayment Plans. These plans adjust your monthly payment to be more manageable based upon your gross income, family size and expenses for eligible federal student loans. The amount you pay will be 10-15% of your discretionary income. Each year you would recertify your information which could result in an even lower payment or a possible increase, if you’ve had changes to your financial situation, which could include a rise in income, the addition of a child, or marriage.
Public Service Loan Forgiveness
Public Service Loan Forgiveness is a government run program that will forgive the remainder of your Direct Loans after you’ve met certain requirements. These requirements include working for an eligible employer (U.S. federal, state, local, or tribal government for non-for-profit organization) while you make 120 qualifying monthly payments in an eligible repayment plan.
The standard federal student loan will have a 10-year repayment term, so to take full advantage of this program, you must repay under an income-driven repayment plan, such that you can have a balance at the end of the 120 payments to be forgiven.
Federal Direct Consolidation Loan
The U.S. Department of Education has a solution called Federal Direct Consolidation Loan. They will take all your loans and consolidate them into one single loan with one single payment. The interest on this new single loan will be the weighted average of all the loans to be added and rounded up to the nearest 1/8th percent. This will simplify the repayment process and could (in rare cases) reduce your total monthly amount due if the sum of the individual minimum monthly payments is more than the new single payment (with minimum monthly payments being at least $50 in for standard loans)
You can consolidate your loans, depending on your total outstanding education debt, you may be able to take up to 30 years to repay them if necessary, also allowing for your payments to be reduced. However, keep in the mind the longer you pay, the more you also pay in interest, making the total cost of your loan even more.
What it Means to Refinance a Federal Student Loan
As mentioned earlier, should you decide to “refinance” your federal student loan(s), you will be taking them out of the federal loan program and moving them to a private lender. This will cause you to lose any benefits you had under the federal loan program such as, multiple repayment options, loan forgiveness, deferment and other financial hardship solutions.
These benefits proved quite valuable recently when the federal government deferred all federally-held student loans during the COVID pandemic. Students (regardless of financial need or hardship) with qualifying loans were able to skip payments for nearly 2 years (without accruing interest) while other federal borrowers and private student loan borrowers were required to make payments, and if they were approved to postpone payments interest was still accruing.
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This calculator is provided for informational purposes only. Calculated results are based on many factors, including the assumptions provided by the user. We cannot and do not provide any guarantees, conditions or warranties as to result accuracy or applicability to the user’s particular circumstances. It is the responsibility of the user to verify that all of the output and resulting calculations are correct. This calculator should not be used by anyone to make material financial decisions and should be used solely for informational purposes. Actual terms will be set by your lender or your school. We encourage any user to seek personalized advice from qualified professionals regarding all personal finance issues. The results of this calculator are not based on any information provided by or an affiliation with any school.
When to Refinance a Federal Student Loan
This leaves the question, when should you refinance your federal student loan? The answer to this depends on your needs. If you think you are going to need the protections for financial hardship or you could qualify for PSLF, it’s probably not a good idea to take your loans out of the federal program.
However, if you feel financially stable, have good to excellent credit and the market is in a good place offering low interest rates, then it might just be time to refinance those loans and save some money. Shop around and secure a new interest rate that will save you money over the life of your loan.
Additionally, if you are struggling to make payments and are looking to change your terms AND save money so you are not paying more in the long term, a student loan refinance also might be the right solution for you. While you can modify your monthly payments down with a Direct Consolidation Loan from the federal government you will eventually pay more over time. If you are a qualified candidate, a student loan refinance with a private lender can offer you that lower payment (due to a lower interest rate) without extending the repayment period by too much, effectively costing you less in the long run.
