Is Refinancing Your Student Loans Worth It in 2023?

If you're like most federal student loan borrowers in the United States, you haven't given much thought to your student debt over the past three years. But with the interest and repayment pause set to end Aug. 30 and federal loan payments coming due in October, many people are about to find themselves with an additional monthly expense.

The end of the repayment pause also means that you're likely to see advertisements from private lenders offering to refinance your federal student loans. So here's what you need to know to be able to make a smart decision.

Image source: Getty Images.

Reasons not to refinance your federal student loans in 2023

Before you even consider refinancing your student loans, remember that the benefits that come with federal student loans don't apply to private loans, which a refinancing loan will be. To name the most important advantages:

No income-driven repayment plans: Private student loans generally don't offer repayment plans based on your income, but federal loans do. In fact, this advantage is set to get even better. The Biden administration plans to create a new income-driven repayment plan that limits student loan payments to just 5% of the borrower's discretionary income.

No loan forgiveness programs: Any loan forgiveness programs don't apply to private loans. This includes the Public Service Loan Forgiveness (PSLF) program, teacher loan forgiveness, and the automatic forgiveness after 20 or 25 years of income-driven repayment. And if the Supreme Court allows the Biden administration's student loan forgiveness plan to proceed, private loans are ineligible, even if they started as federal loans and were refinanced.

Forbearance and deferment options: To be fair, many private student loans will allow you to postpone repayment for a certain length of time, but the forbearance and deferment programs available to federal student loan borrowers are far better than anything you're likely to find in the private market.

More forgiving of the borrower: Federal student loans aren't considered delinquent until the borrower has missed three payments, while a private loan is delinquent as soon as a single payment is missed.

Who should look into refinancing?

In simple terms, federal student loan refinancing is best suited to borrowers who don't benefit from the advantages discussed previously. Specifically, if you make too much money to benefit from an income-driven repayment plan and don't anticipate qualifying for any sort of loan forgiveness, a private refinancing loan could be worth a look.

Plus, since private lenders take the borrower's credit history into account, refinancing is also generally not a great option for borrowers with below-average credit.

Could you actually save money by refinancing?

There are two big reasons to refinance: to lower your interest rate or change your repayment term. And both are generally done with the same objective: to save money.

Different private lenders offer different term lengths, ranging from a few years to a few decades. If you can afford a higher monthly payment, choosing a shorter repayment term is a surefire way to save money on interest.

As far as interest rates are concerned, the question is whether you can get a lower interest rate from a private lender than you are currently paying on your federal student loans. And since we're in a relatively high-interest rate environment compared to much of the past couple of decades, this isn't always the case.

As one real-world example, online banking company SoFi offers student loan refinancing with fixed interest rates from 4.99% to 9.99%, depending on the borrower's credit.

Meanwhile, the chart shows the federal student loan interest rates for certain academic years (consult your loan servicer to find your specific loans' interest rates):

Data source: Savingforcollege.com. Chart by author.

The point is, interest rates on federal student loans are generally low and weren't dependent on the borrower's credit history. And in some cases (see 2020-2021), federal student loans have interest rates the private market is unable to match in the current environment.

However, depending on your credit history and the year(s) you obtained your student loans, it's certainly possible that you could find a lower interest rate by refinancing. And federal student loans made for the 2005-2006 academic year or earlier had variable interest rates, so borrowers may want to refinance into fixed-rate loans.

Should you refinance?

The bottom line on student loan refinancing is that most borrowers are likely to benefit from keeping their federal student loans as federal student loans. However, there are certain groups of people -- particularly those with strong credit and high incomes -- who could potentially benefit from refinancing.