What To Watch Out For When Refinancing Federal Student Loans

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Refinancing your student loan is an effective way to simplify your finances by consolidating your various monthly payments with just one lender into a new monthly invoice.

Those who qualify for a refinance can also shorten or extend their repayment terms, whichever is best for their finances, and they can also get a lower interest rate.

Sounds too good to be true? There is a catch, especially for federal student loan borrowers.

For borrowers who have US Department of Education-held loans, the only option is to get refinance through a private lender such as a major bank, credit union, or online lender. The government does not offer any refinancing options, only a direct consolidation loan program.

However, once a federal student loan borrower exchanges their loan for a refinanced loan through a private lender, they lose all state loan protection they once had.

If you are a federal student loan borrower, you need to know beforehand what you will miss when moving to a private company. These unique state protections for state borrowers offer security you may not want to give up – most notably the state student loan freeze through September 2021 and a current 0% interest rate.

Here are some of the additional protections:

  • Deferral and deferral for up to three years (and no interest will be charged on subsidized federal loans during the deferral)
  • Access to income-oriented repayment plans that recalculate your monthly bill based on changes in income
  • Assignment programs for specific jobs through public service loan (PSLF) and teacher loan allocation

If the Biden administration continues with widespread student loan issuance in the end, borrowers who have chosen to refinance with a private lender will no longer qualify for cancellation.

Consider a private lender who offers their own protection

With federal student loan payments and interest suspended until September 2021, now is not the time to refinance federal loans. However, when this Covid-related grace period ends and you want to try to secure a lower interest rate by refinancing, you should know that there are some private lenders who have their own payment protection for borrowers. This protection isn’t as extensive as what you’d get with federal loans, but it’s at least some form of security.

The coverage can include deferment in the event of unemployment or economic hardship, as well as the option of only making interest payments before the repayment period begins.

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

  • Unemployment protection (tolerance in 3-month steps, limited to 12 months)
  • Covid failure to make payments for at least 90 days in financial distress
  • Loan deferral when going back to school
  • First six months of the existing grace period for loans to be refinanced

Refinancing the SoFi student loan

  • costs

    No origination fees for refinancing

  • Eligible Loans

    Federal, personal, graduate and graduate loans, Parent PLUS loans, doctor and dentist loans

  • Loan types

  • Variable rates (APR)

    From 2.24%; from 2.37% for doctors / dentists (prices include 0.25% autopay discount)

  • Fixed prices (APR)

    From 2.99%; from 3.12% for doctors / dentists (prices include 0.25% Autopay discount)

  • Credit terms

  • Loan amounts

    Starting at $ 5,000; over $ 10,000 for medical / dental residence loans

  • Minimum creditworthiness

  • Minimum income

  • Allow a co-signer

For borrowers with government and private student loans

While you should hold back on refinancing your federal student loan during the current payment suspension, the opposite is true for your private student loans.

Private student loans are not part of the Covid-induced deferral, your monthly payments are still due and the interest has continued to accrue. For this reason, if the interest rate is high, or if your creditworthiness has improved since taking the loan, you should only refinance your personal student loans. Now is a good time to take advantage of historically low interest rates before they rise again.

Regardless of whether you decide to refinance today, you should know that many private lenders have set up some form of payment facility for borrowers in financial need. Make sure to ask your respective lender if they offer assistance at this point and how you can qualify.

Note to editors: The opinions, analyzes, reviews or recommendations expressed in this article are solely those of the Select editors and have not been reviewed, approved or otherwise endorsed by third parties.


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