The Advantages and Disadvantages of Refinancing Federal Student Loans

Why refinancing federal student loans may not be your best debt relief option

If you’re looking for a way to reduce your monthly student loan payment, refinancing may seem like a good idea. 

Key Takeaways:

• Refinancing a federal student loan may make you ineligible for additional debt relief assistance.
• Refinanced loans are done through private lending companies.
• Loan refinancing is not the same as debt consolidation.

While it may work for some, refinancing federal student loans makes you ineligible for other debt relief options like the student loan relief program, since your new loan will be with a private company.

With the pause on student loan repayments coming to an end, many people are interested in finding ways to save money and reduce their debt, which is why refinancing is such an attractive possibility.

While you may be able to find a lower interest rate, there are a few important aspects to consider before you make the change.

What are the advantages of refinancing federal student loans?

When refinancing federal student loans, you are switching from a loan owned by the federal government to a private company. You can often find lower interest rates which can decrease your monthly payment. That’s good news if your goal is to reduce your monthly expenditures.

You should always review multiple lenders before choosing which one works best for your financial situation. This process is easy as most lenders will determine if you qualify, the amount of your monthly payments, and your loan rates and details by running a soft credit check.

Depending on your credit score, you may be able to save a significant amount of money, especially if you fall in Good (670 – 739,) Very Good ( 740 – 799,) or Excellent (800+.) For example, if you owe $40,000 with an 8% interest rate and 10 years left on your repayment terms, refinancing at a 5% interest rate will save you around $5,500.

Additional benefits of refinancing federal student loans include:

• Consolidating all your student loans into one monthly payment. If you have multiple student loans (federal and private) you can combine them.
• Receiving a new lending company. You may want to work with a new lender if you’re not satisfied with your current one.

The Disadvantages of Refinancing Federal Student Loans

While the main advantage of refinancing federal student loans is to save money, the disadvantages may outweigh the overall savings. With federal student loans, you have access to a wider range of debt relief options, which was evident during the pandemic. 

These borrowers were able to take advantage of payment pauses and loan forgiveness, but those with private lenders didn’t have access to these protections. 

Before refinancing your loan, ask yourself these questions:

• Is my job secure?
• Can I afford all of my financial obligations if I was no longer employed or needed to find a new job?
• Do I qualify for additional federal loan forgiveness programs?

If the answer to any of these questions is “Yes,” you may want to reconsider refinancing. 

What are some of the federal forgiveness programs you will no longer have access to?

If you choose to refinance your federal student loan, you will no longer be eligible for any federal protection benefits. Let’s take a closer look at some of the benefits you will lose access to.

Loan discharge

Federal student loans may be eligible for a loan discharge in certain circumstances like if the borrower becomes permanently or completely disabled or dies, or if your school is convicted of fraud. While some private lenders may offer this option, it will vary between each company.

Debt cancellation

Currently, there is a proposal to cancel up to $20,000 of student loan debt, which is in the hands of the Supreme Court. This and any future debt cancellation bills may only apply to those with federal student loans, making those with private lenders ineligible.

Payment postponements and deferred interest

If you encounter a financial crisis like losing your job or sickness, you can apply for a deferment, where you will receive a temporary pause on your monthly repayments. During this time your interest will not accrue if you have a subsidized loan, but you will also not lower your overall debt. You may also qualify for an income-driven repayment plan, which can allow you to pay as little as $0 a month.

Payment and interest waivers

If there is a significant occurrence like the pandemic, the government may decide to suspend payment and interest on all federal student loans for a specific period of time.

Flexible payment options

There are many federal repayment options available that make it easier to afford your monthly payment. These plans base your monthly payment on your family size and income and often forgive the balance of your debt after 20 to 25 years. While many refinance lenders can decrease your monthly payment temporarily, finding one that offers an income-driven plan is very rare.

Loan forgiveness opportunities

Those working at a not-for-profit or government organization may be eligible for public service loan forgiveness. To qualify you must work full-time for an eligible employer and have made “the equivalent of 120 qualifying monthly payments under an accepted repayment plan.”

The difference between debt consolidation and refinancing federal student loans

Many people often confuse debt consolidation with refinancing, but they are different. While there are similarities (both options can help you lower your interest rates and reduce your monthly payments,) debt consolidation is generally used for combining credit card debt while federal student loan refinancing is changing the terms of an existing debt obligation. You can consolidate your student loans, but federal consolidation won’t save you money or reduce the interest rate. 

While there are advantages to refinancing federal student loans, for many, the disadvantages outweigh any potential benefits. When you refinance a federal student loan you switch to a private lender, which can reduce your interest rate and save you money on your monthly payments. 

While lower monthly expenditures are appealing, you will lose access to federal protection options like debt relief and deferred payments. Be sure to research your options carefully so you can make the best choice to help you gain financial freedom. 

If your debt has become unmanageable and you have difficulty making your debt payments each month, then you should consider negotiating a debt settlement and a payment plan that suits your budget.

Talk to a certified Debt Specialist at Americor, who can provide personalized advice tailored to your specific needs.

By taking proactive steps, you can put an end to your financial stress and work towards a brighter financial future. Remember, there is always hope for debt relief, and our team of experienced professionals are ready to guide you on your journey to regaining control of your finances.

For more information on Americor’s debt relief services, contact us today to see how we can help you pay off your debts, and get on the fast-track to becoming completely debt-free!