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Federal or Private Student Loans: Should I Refinance?

What you'll learn: Differences between refinancing federal and private student loans


Student Loan Refinancing is an effective method for making student debt easier to manage.

But before moving forward with a refinance, it’s important to understand the key differences between refinancing federal and private student loans — because there are quite a few.

If you haven’t already heard of this student loan payoff strategy, now’s a great time to learn if it’s a smart idea. Current refinance rates are shockingly low and could save you significantly on finance charges.

Here are all the details you need about refinancing federal or private student loans.

What is student loan refinancing?

Student loan refinancing is the process of taking out a new loan with a private lender — typically a credit union like PenFed, a bank, or another financial institution — that covers the cost of your current student debt.

After refinancing, your student loan debt will look completely different — you’ll have a new loan servicer, possibly a lower interest rate, and a different repayment term. Plus, all your previous loans will be combined into one monthly payment.

However, it’s important to keep in mind that you will need to meet certain criteria to qualify for refinancing. Private lenders like PenFed require a strong credit history and solid income. But even if you’re missing one of those two essential ingredients, you can still apply with a creditworthy cosigner — like a parent, spouse, or other relatives — to have a higher chance of being approved — and maybe even get a better rate.

Key benefits of refinancing

The great thing about refinancing is that it’s customizable to your financial needs and student loan pay off goals.

Want to pay off student loans faster? Or maybe drop your monthly loan payment? Or do you simply need an easier way to manage a large number of different loans?

It’s all possible with student loan refinancing. And whether you’re refinancing federal loans, private loans, or a combination of both, there are certain benefits that you can choose to take advantage of.

Here are some of the most popular reasons to refinance:

  • Get a lower rate. By qualifying for a better rate than you currently have, you’ll pay less on finance charges — both month-to-month and over the life of your loan. Depending on the rates you’re approved for, you could have the opportunity to save hundreds to thousands of dollars.
  • Save on interest. By opting for a shorter term, you can save both time and money — you’ll pay off your loans much faster and get rid of your debt for good, while accumulating less total finance charges.
  • Lower your monthly payment. By choosing a longer term, you can substantially lower your payments. If money is tight or you’re hoping to save your extra cash for other reasons, dropping your monthly bill could be a big help. But keep in mind with a longer term, you may end up paying more in total finance charges over time — even at a lower rate.
  • Consolidate your loans into one. With refinancing, you can take advantage of merging all your different student loans into a single loan. This will simplify your finances, with just one loan servicer and one monthly payment to keep track of.
  • Choose a better loan servicer. If your current loan servicer has unreliable customer support or poor online experience, you may be in the market for a new one. Refinancing with PenFed sets you up with a member-focused lender with a reputation you can trust.
  • Remove a cosigner. Refinancing gives you the option to drop a cosigner who’s currently on your loan. If you’re in a stable place financially, this would remove your cosigner from all responsibility for the debt — and removes your loan from their credit report, too.

Refinancing federal student loans

If you have federal student loans, there are three important caveats to keep in mind before choosing to refinance:

1. Refinancing is only offered by private lenders. This means you’ll be changing your federal loans to private loans. By doing so, you’ll lose federal student loan benefits offered by the U.S. Department of Education including access to:

  • Income-driven repayment (IDR) plans
  • Public Service Loan Forgiveness (PSLF)
  • Deferment and forbearance options

If you can qualify for one of those repayment programs, it may be a better solution than refinancing — depending on your financial situation and needs.

2. Federal student loans are currently deferred until September 30, 2020. Due to the coronavirus pandemic, the U.S. Department of Education has deferred all federal student loan payments with zero interest until September 30, 2020. In most circumstances, it may be in the best interest of federal loan borrowers to hold on refinancing until payments resume in October.

3. Typically, federal student loans already have a fairly low interest rate. Federal loan rates are set by Congress each year and aren’t affected by a borrower’s credit score, income, or other financial factors. With refinancing, your rate is almost entirely dependent on credit history and income. So if you aren’t the strongest in one or both of those departments, it could be difficult to qualify for a lower rate than you currently have — even with a cosigner.

Refinancing private student loans

Refinancing private student loans is usually a more straightforward decision.

It’s a no-brainer in most situations if you’re able to qualify for a lower rate than your current private loans.

If you can get a better rate through refinancing, the benefit is simple: you’ll save money on finance charges over the life of your private loans — sometimes significantly. Plus, you’ll enjoy other benefits like a repayment term that matches your goals and just one monthly payment to worry about.

Generally, there aren’t many major drawbacks of refinancing private loans with a lender like PenFed because you’re not giving up access to federal benefits like potential loan forgiveness. That said, you should review the terms and benefits of your current loans before you consider refinancing.

Is refinancing right for you?

If refinancing sounds like a smart solution for your needs, step one is to check if you qualify. If you can’t qualify on your own, remember you can always apply with a creditworthy cosigner.

You can check if you qualify with PenFed’s Find My Rate tool in just a few minutes — with no impact on your credit score whatsoever.

After seeing if you qualify, you’ll also be able to view the rates you’re pre-qualified for. Take your time with your rate and term options to find the right combination for your goals.

From there, you’ll just need to weigh the potential drawbacks of refinancing federal student loans (if you have them) with the benefits you would get from your new rate, term, and monthly payment options.

Refinancing has helped countless student loan borrowers to better manage their debt — but it’s not for everyone. Remember to do your research to make an informed decision for you and your family.

PenFed is federally insured by NCUA.

Ready to Refinance?

See the benefits of refinancing your student loans at PenFed.