Refinancing student loans is a technique some borrowers use to reduce their interest rate and lower their monthly payments. It requires obtaining a new student loan refinance loan and using the money to repay one or more existing educational debts.
You must get a refinance loan from a private lender, as the Department of Education doesn't offer this option. If you have existing private loans you're refinancing, this isn't a big deal, as you'll just be changing from one private loan provider to another.
But if you have federal student loans, refinancing isn't possible without converting the debt to private student loan debt. You probably don't want to do that, for four key reasons.
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1. You could lose the chance to participate in Biden's loan forgiveness plan
President Biden has pledged to cancel up to $20,000 in student loan debt for certain borrowers. While it's still unclear whether the promised loan forgiveness will occur, because of a pending Supreme Court case challenging the legality of the president's action, as of right now it's possible borrowers with federal loans could see some of that debt disappear.
Under the Biden plan, though, loan forgiveness applies only to eligible federal loans, though. There's no forgiveness for private student debt. That means if you convert your federal loans to private loans by refinancing, you will lose this opportunity to take part in either this forgiveness program or any other student debt relief lawmakers provide in the future.
2. You'll give up your remaining months of forbearance
Interest and payments on federal student loans were put on pause during the pandemic. While payments are expected to resume at the end of this summer, there are still a few months left during which no interest is accruing and no payments are due.
If you refinance your federal student loans, you will give up any remaining time left on forbearance. And if there's ever a pause on payments in the future, it probably won't apply to you.
Most private student loan lenders are also far less flexible on when you can put loans into deferment or forbearance outside of pandemic situations, while the federal government allows many options to suspend payments for various reasons, such as economic hardship or being diagnosed with cancer.
You don't want to give up the chance to take a break from student loan payments when things go wrong.
3. You'll lose access to income-driven payment plans
When you have federal student loans, changing your payment plan is relatively easy and can be done when you need to simply by reaching out to your loan servicer. There are many different payment plan options to choose from as well, including several income-driven plans.
These plans don't just limit your monthly student loan payments to a set percentage of income -- between 10% and 20%, depending on which payment plan you select. After 20 or 25 years, any balance left on your loans can also be forgiven.
Private loans, on the other hand, don't have any income-driven plans. You must pay the amount promised when you took out the loan, which is based on how long it takes to pay your balance in full during the loan term.
4. Public service loan forgiveness will be off the table
Participating in an income-driven plan isn't the only way to have some of your federal loans forgiven. You could also potentially become eligible for Public Service Loan Forgiveness. This program allows you to have the remaining balance of eligible loans forgiven after 120 payments if you work full-time for a qualifying government entity or not-for-profit.
Private student loan lenders don't forgive your debt over public service work, so once you've refinanced federal loans into private loans, this won't be an option for you.
Borrowers should be aware of these major downsides of refinancing federal student loans and should generally avoid making this move. Student loan consolidation is an alternative that can be completed through the Department of Education to simplify repayment by combining multiple loans into one -- although this won't reduce your interest rate.
While it may be disappointing not to be able to take advantage of options to refinance at a low rate, the fact is the federal borrower benefits are typically too good to give up.
