Can You Refinance Federal Student Loans?

Nancy BilyeauUpdated August 4, 2023

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If you are paying off a federal student loan, it is sometimes possible to refinance—but you’ll need to carefully consider whether it’s the right choice for you.Many Americans holding federal student loan debt may have looked to refinance with a private lender hoping to ease their burden. In the autumn of 2023, the three-year-plus payment pause on federal student loan payments will end. This means that more than 43 million Americans carrying those student loans will have to resume debt payments. The federal student loan debt stands at about $1.7 trillion.However, while jumping to a new loan with a lower interest rate may seem like a win-win, not everyone is in position to refinance federal student loans—and there are pros and cons to doing so.

Is Refinancing Federal Student Loans Possible?

When a student fills out a Free Application for Federal Student Aid (FAFSA) form, the government takes into account income, as well as other factors, in determining eligibility for financial aid. Should the need exist, the student will receive a government loan with a fixed interest rate that needs to be repaid after graduation, often following a six month grace period.The average amount of debt owed by people carrying federal student loans is $37,338. The standard repayment term is 10 years. Income-driven repayment plans allow borrowers to stretch out their student payments even longer. If you have multiple federal student loans, you may be able to combine them into one loan with a fixed interest rate based on the average of the interest rates on the loans being consolidated. This would allow you to consolidate multiple federal education loans into one loan at no cost to you.It’s a whole different ball game with the private lenders. The answer to the question, “Can you refinance federal student loans?” is perhaps you can — but first you have to qualify. Instead of proving need, as with FAFSA, you’ll need to establish the ability to repay. Lenders usually look at the person’s credit score and debt-to-income ratio when deciding whether to make an offer and at what terms.If you pursue this goal and go through with refinancing, you’ll have an entirely new loan. The private lender pays off the old one and creates a direct relationship with you. Now your interest rate could be lower and the length of time to repay your loan could be shorter or longer, depending on what you agree to.

How to Refinance Federal Loans

You’ll need to follow some simple steps to refinance. Experts recommend you take a look at your credit score. That’s going to be important to the private lenders. As you explore offers from the private companies, scrutinize their rates. Once you settle on your option, you’ll need to accept the lender’s new terms and sign the paperwork.

Must Do It Through a Private Lender

You can consolidate your federal loans but you cannot refinance them through the government. Refinancing is only available through a private lender.

Advantages of Refinancing Federal Student Loan

Government student loan refinance has pros and cons.

The biggest advantage is savings. You may be able to obtain significant savings if you pivot away from high-interest federal loans. You can compare student loan refinancing rates to see what your options are.
Another plus is using a cosigner. Some refinancing lenders allow you to add a loan cosigner. If your chosen person has a strong credit rating, it will help you get approved and at a lower interest rate than you might have been able to get on your own.
If you dislike your federal loan server, you may be in for a more pleasant experience with the new choice. Some private lenders offer career coaching and other benefits.

Disadvantages of Refinancing Federal Student Loan

One of the main reasons not to choose this route is what you will no longer be able to get.

If you refinance, you lose out on federal student loan forgiveness. Not only will you be unable to qualify for loan write-off programs tied to a public service career, military service or disability, you’ll be left out of any future programs the government creates.
You might not qualify for a desirable loan. If you’re building your credit or you just suffered a financial setback, this might not be the optimal time to present yourself to a private lender.
Refinancing could end up lengthening the amount of time you’re on the hook for student loans.

Should You Refinance Your Federal Student Loans?

Since this is unquestionably going to impact your budget for years, take a hard look at the decision. Here are some questions you can ask yourself to guide you.

How Much Can Refinancing Save You?

The average monthly federal student loan payment is $393. From 2006 to 2022, the average federal loan interest rate was 6.06%. The undergraduate federal loan interest rate for the 2023-24 academic year is 5.50%, and the rate is 7.05% for graduate students. If you refinance, you may be able to qualify for an APR that is as low as 4%. However, it’s important to know that private rates can reach higher than 12.99% fixed.

Do You Plan on Using Federal Repayment Options?

The federal government offers a range of income-driven repayment options. If you lose your job or run into serious financial problems, you may long for such alternatives.The program some people turn to is the Revised Pay As You Earn Repayment Plan (REPAYE Plan). Generally, your payment amount under an income-driven repayment plan is a percentage of your discretionary income.

What Are the New Repayment Terms?

Remember to look for late fees and other catches to what may seem like an appealing refinance plan. But also, it’s important to know that while your repayment terms from a private lender won’t fall under government forgiveness, there are some protections offered. Check with the lender to learn options.

Does Refinancing Make Sense for You?

Comparing quotes will help you determine if this is the right way for you to go. Run the numbers of the various plans. Some private lenders offer the choice of a fixed or variable rate.But also, think hard about your finances, your career path, and family needs, when figuring out the plan for your student loans.

The Takeaway

With the pause on federal student loans ending in autumn 2023, this is a good time to study your options. Lower student loan interest rates, if obtainable, make refinancing a federal student loan an avenue worth exploring. If you qualify for a strong offer, you could stand to save money. However, by turning your federal loan into a private one, you would also take yourself out of the running for federal loan forgiveness programs and future write-offs of debt. It’s important to weigh all the pros and cons when investigating a refinance of your student loan. If you think it might be the right course of action for you, Lantern can help you explore your options. In our marketplace, you can get offers from multiple lenders at once to compare student loan refinancing rates and terms.

Photo credit: iStock/ridvan_celik

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About the Author

Nancy Bilyeau

Nancy Bilyeau writes about student loans, mortgages, car insurance, medical debt and many other finance topics for Lantern. A veteran of the magazine business, she has edited stories on personal finance for Good Housekeeping and DuJour magazines and has written articles for The Wall Street Journal, Readers' Digest, Parade, Town & Country and Lifetime/A&E, among others. She is a graduate of the University of Michigan.

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