“Can I Refinance My Student Loans?”

I was at the bank the other day and saw a brochure on the counter: “NEW! EDUCATION REFINANCE LOAN! REFINANCE YOUR STUDENT LOANS AND SAVE!”

Refinance, you say? Save money, you say? Tell me more, you say!

“Can I Refinance My Student Loans?”

This is a question we get a lot—and understandably so. With other types of consumer debt, like mortgages, you often read about borrowers refinancing to take advantage of “historically low” interest rates. Who wouldn’t want to do that with their student loans? Unfortunately, it’s not that straightforward.

Federal law sets the interest rates for federal student loans, and these rates are fixed (you can see what they currently are in our handy borrower’s cheat sheet). You cannot refinance a federal loan into another federal loan at a lower rate. That option simply doesn’t exist. You can, however, consolidate federal loans.

How Is Consolidation Different From Refinancing?

Well, at a high level, it’s not really. Just like refinancing, consolidating your loans means replacing your old loans with a shiny new one with new terms. Unlike refinancing, consolidating won’t necessarily lower your interest rate—even if it appears that way.

Interest rates on Consolidation loans are the weighted average of the rates of the loans consolidated, rounded up to the nearest 1/8th of a percent. So, even if the rate is lower than it was for some of your loans, this all balances out. Consolidation can also increase your loan’s repayment period, meaning you could end up paying more overall. Altogether, this option has pros and cons to weigh before using it.

Ultimately, though, a federal Consolidation loan is still a federal loan, which means it still may have many of the benefits of a federal loan. That won’t be the case when refinancing with a private loan.

The Pros And Cons Of Refinancing

While you can’t refinance federal loans into a new federal loan, you may be able to refinance them into a private loan. (Ditto for refinancing a private loan into a new private loan.) This has been popular recently, with newcomers like SoFi competing with big banks like Citizens Bank for the best customers.

But is doing this good for you? Well, that depends. If you are a few years out of school, have high-interest private loans, and have a steady income and stellar credit, check out your options. If you can qualify for a low fixed rate on a new loan, you can save money—especially if you use those savings to pay your principal balance off faster.

On the other hand, if you have federal loans, refinancing them with a private loan can be risky. That’s because doing so will erase all the protections and benefits that come with federal loans. Loan forgiveness, income-driven repayment plans, payment postponements, and so on could now be out of reach.

So, Should You Refinance?

Everyone’s situation will be different. If you can get a new loan with better terms, it may be a good deal. You certainly could save some money, especially if your debt is mostly in Grad PLUS or Parent PLUS loans, which have slightly higher rates. Still, those federal loans deserve additional consideration.

Do you make enough money that an income-driven plan isn’t relevant? Are you not going to qualify for student loan forgiveness? Are you confident that your job isn’t at risk? And do you have at least a year’s worth of expenses saved in an emergency fund?

If you answered “yes” to all of those questions, refinancing your federal loans could still be a good deal, even if it does carry more risks than refinancing a private loan. Still, remember that once you refinance your federal loans by replacing them with a new private loan, you cannot move or consolidate the loan back into a federal loan—and you cannot reclaim the benefits of federal loans either.

Regardless of whether you refinance your federal loans or just your private loans, be sure you know what you’re getting into before you sign up.

Have you refinanced your federal student loans? How did it work out?