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Is It a Good Idea to Refinance Federal Student Loans Right Now?

Editor’s Note: This article has been updated to reflect the Biden administration’s extension of the federal student loan payment freeze through Aug. 31, 2022. It also reflects federal student loan interest rates for the 2022-2023 school year.

Refinancing student loan debt could help you save money in the long term and streamline your monthly payments. The question is, when is the right time to refinance?

Thanks to the Federal Reserve’s keeping interest rates near zero (since early 2020), many private lenders have held their rates down, making refinancing attractive for some borrowers right now who wish to take advantage of a low rate. At the same time, however, the government, through several executive orders, has waived interest and deferred payments on federally held loans through Aug. 31, 2022. So if you have federal student loans, you may be wondering what to do: Should you continue taking advantage of 0% interest and no required payments until September — or should you refinance your education debt while rates are still low?

Of course, it’s impossible to know if interest rates will stay down or rise much higher. On the other hand, the Department of Education has called the recent payment pause extension the last extension. (It has since extended the pause twice.) It’s important to weigh your long-term financial benefits of refinancing with the potential downsides. Here’s a closer look at situations where it may and may not make sense to refinance.

What It Means to Refinance Your Federal Loans

Before we get into specific scenarios, it helps to understand what refinancing means. Also, you should know how it’s different from consolidating your federal student loans.

Refinancing student loans means taking out a new private student loan to pay them off. Going forward, payments would be made to the new loan servicer. The new loan may have a different interest rate and monthly payment than the old ones. Refinancing your federal student loans also means you forfeit any federal benefits that come along with them, like federal forbearance options and income-driven repayment plans.

Consolidating federal student loans, on the other hand, combines them into a new federal Direct Consolidation Loan. There will still be one monthly payment but the interest rate will reflect the average of the rates being paid across the previous loans, rounded up to the nearest eighth of a percent.

Refinancing May Pay if Your Current Interest Rate Is High

As noted earlier, government action has brought interest rates on federally held student loans down to zero through Aug. 31, 2022. Typically, though, federal student loans carry lower interest rates than private student loans. For the 2022 – 2023 academic year, for example, new Direct Subsidized and Unsubsidized Loans for undergraduate borrowers carry a fixed interest rate of 4.99% while for graduate and professional borrowers like law school students the rate is 6.54%.

Yet for those who have existing federal student loans with higher rates, the current low interest rate environment may present a good time to consider refinancing. Of course, the bigger the difference between your current rate and the refinance rate, the more the savings, but even small differences in rates can yield significant savings over the life of the loan.

For instance, let’s say there’s a graduate school borrower who just graduated with $40,000 in federal student loan debt at a 6.6% interest rate. They could pay off the loans under the 10-year Standard Repayment Plan or they may be eligible to refinance that debt.

If that new grad does not refinance their federally held loan, they will not have to pay anything before September. But say the new grad could shave just 1% from their interest rate and refinance into a new 10-year private loan at 5.6% instead. That 1% reduction in interest could mean a monthly savings of about $20 ($436 instead of $456, which would be due once federal relief and any grace period end) and a lifetime savings of roughly $2,416—assuming all payments are made on time. Cut that rate by 2% to 4.6% and the monthly savings in interest could amount to about $39 and a lifetime interest savings of approximately $4,769. Cut that rate by 3% to 3.6% and the monthly savings in interest could be about $58, with the lifetime interest savings amounting to approximately $7,057.

Keep in mind, however, that your getting a lower interest rate depends on such factors as your credit score, credit history, and debt-to-income ratio—and every lender has different qualifying criteria.

Refinancing May Not Pay if Your Income Is or May Become Unstable

Refinancing federal student loans into a new private student loan means giving up certain federal benefits and protections, including the option to defer payments on those loans or apply for income-driven repayment.

Private student loan lenders aren’t required to offer any of these benefits or protections, though some do have similar programs. For example, SoFi offers unemployment protection to its members, which allows those eligible to temporarily pause payments on their loans if they lose their job. Another benefit available to all SoFi members is one-on-one career coaching in areas like interview techniques, networking, negotiation, and more.

Refinancing May Pay in the Long Term if Your Balance Is High

When your balance is high (say, five figures or more), the savings from a lower rate are amplified. In fact, depending on your balance, the difference between your old and new interest rates, and other factors, the long-term savings from refinancing could outweigh the short-term savings from not paying the government interest for the remaining months of the payment pause.

For a very simplified example, say you have a graduate federal student loan for $100,000 with a 6% fixed interest rate, you’re enrolled in the Standard Repayment Plan of 10 years (120 months), and you were to start making monthly payments of about $1,110 last November. Over the life of the loan, you would pay a total of about $33,225 in interest.

But if you were eligible to refinance now to a fixed rate of 3%, your monthly payments could drop to about $966 — and over 10 years, the total interest you would have paid is about $15,873. Of course, refinancing now could mean making payments when federally held student loan payments are on pause and the interest rate for them is 0%.

Also, this example assumes fixed rates and does not take into account any refinancing fees or finance charges. Additionally, your situation will be different if you have been making payments (before and throughout the forbearance period starting April 2020). That is, the closer you are to paying off your loan, the less you will save by refinancing (this is because near the end of your amortization schedule, you are mostly paying principal).

Refinancing May Not Pay if the New Interest Rate Is Variable

When refinancing federal student loans, it’s important to think about whether refinancing to a fixed rate or a variable interest rate would be better for a particular financial situation. With a fixed rate, there is certainty that the rate and payments won’t change over time. But when interest rates are low across the board, variable rates could look even more attractive.

The problem is that variable rates aren’t guaranteed to stay low. If the benchmark rate they track increases, the rate on the loans can increase as well. Borrowers considering refinancing federal student loans may want to think carefully about whether it makes more sense for them to consider a fixed or variable rate loan.

Refinancing May Pay if Your Federal Loan Is Privately Held

First and foremost, a key reason not to refinance is because the government has suspended payments and cut the interest rate to zero for all federally held student loans through Aug. 31, 2022. But all federal loans are not necessarily federally held. So if your federal loan is actually held by a commercial lender, you have less reason not to take advantage of lower rates.

Which loans are not federally held? Some under the Federal Family Education Loan (FFEL) Program are commercial. (That said, the Department of Education has extended 0% interest to defaulted FFEL loans and made it retroactive to March 13, 2020.

Similarly, some Perkins Loans are held by the school instead of the federal government.

Many private lenders have also granted forbearance during the coronavirus crisis, so you can’t assume your loan is federally held just because your payments have been suspended. To find out who holds your loan, contact the servicer.

Refinancing May Not Pay if You’re Seeking Public Service Loan Forgiveness

Borrowers may want to rethink refinancing federal student loans if they’re hoping to qualify for Public Service Loan Forgiveness (PSLF). They’ll need to keep their loans with their federal student loan servicer and make the required number of on-time payments to maintain their eligibility.

Finding the Right Lender for Federal Student Loan Refinancing

It pays to shop around for the right lender when leaning toward refinancing federal student loans. That means comparing interest rates, loan fees, loan repayment terms, and other benefits to find the loan that fits your needs and budget.

Check out student loan refinance rates offered by SoFi.
Learn More

SoFi Student Loan Refinance
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS #1121636 , a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. For additional product-specific legal and licensing information, see SoFi.com/legal.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.


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ABOUT Brian Walsh Brian leads the financial planning team at SoFi and is a CERTIFIED FINANCIAL PLANNER™ professional. As a self-proclaimed financial planning nerd, he leverages research, member feedback, and past experience to deliver advice that is both meaningful and practical.

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