What To Watch Out For When Refinancing Federal Student Loans

Refinancing your student loans is an effective way to simplify your finances by combing your various monthly payments into one new monthly bill with just one lender.

Those who qualify for refinancing are also able to shorten or lengthen their loan repayment term according to what works best for their finances, and they may score a lower interest rate to boot.

Sound too good to be true? For federal student loan borrowers specifically, there is a catch.

For borrowers who have loans that are owned by the U.S. Department of Education, the only option is to refinance through a private lender, like a big bank, credit union or online lender. The government does not offer refinancing options, just a Direct Consolidation Loan program.

Once a federal student loan borrower swaps in their loans for a refinanced loan through a private lender, however, they lose all of the federal loan protections they once had.

If you’re a federal student loan borrower, you need to be aware ahead of time what you will miss out on by moving over to a private company. These unique governmental protections set in place for federal borrowers offer peace of mind you may not be willing to give up — most notably the federal student loan freeze that’s in place freeze through September 2021 and a current interest rate of 0%.

Here are some of the additional protections:

• Deferment and forbearance for up to three years (and with subsidized federal loans, you aren’t charged interest during deferment)
• Access to income-driven repayment plans that recalculate your monthly bill based on any changes in income
• Forgiveness programs for certain jobs through Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness

Plus, if the Biden administration does end up moving forward with any type of widespread student loan forgiveness, borrowers who chose to refinance with a private lender will no long qualify for cancellation.

With federal student loan payments and interest on pause through September 2021, now is not the time to be refinancing federal loans. However, when this Covid-related postponement period ends and if you want to try locking in a lower interest rate through refinancing, know that there are some private lenders that have their own payment protections for borrowers. These protections won’t be as extensive as what you would receive with federal loans, but at least it’s some form of security.

Protections may include deferment in the case of unemployment or economic hardship, as well as the option to make interest-only payments before your repayment term begins.

SoFi Student Loan Refinancing, for example, offers borrowers the following:

• Unemployment protection (forbearance offered in three-month increments, capped at 12 months)
• Covid forbearance of payments for a minimum of 90 days, if experiencing financial hardship
• Loan deferment, if going back to school
• First six months of pre-existing grace period on loans looking to be refinanced