When is the Right Time to Refinance Federal Student Loans?

When is the Right Time to Refinance Federal Student Loans?

No one likes thinking about their debt. But ignoring it isn’t going to make it go away. If you’re one of the more than 43 million borrowers with federal student loan debt, you’ve maybe thought about refinancing your student loans. However, it’s important to know the finer points of this process before going through with anything. So, when is the right time to refinance federal student loans?

What Is Student Loan Refinancing?

The term “refinancing” is an incredibly common term. Across all sorts of loans and borrowers, refinancing is a tool that allows one to make their debt more affordable. But what is refinancing, and how does this work?

The basic premise of refinancing is simple. You have a loan. You want that loan to come with better terms and conditions than what it’s currently offering you. Refinancing allows you to borrow with a new loan—either from the same or a different lender—to pay off and replace your current loan.

There’s one primary motivation for refinancing any kind of loan: lowering your interest rates. High interest rates are like a poison for those looking to save money—much less build some kind of nest egg or wealth. Interest rates determine how much money you’ll pay back to the lender in addition to the amount received by the borrower. Even just a few percentage points up or down can make the difference between paying thousands of dollars over the course of a loan.

But there’s a significant ripple you need to know about if you’re thinking about refinancing your federal student loans. While it’s possible to consolidate student loans through the federal government, you can only refinance through a private lender. While this might initially make it seem like you shouldn’t even consider consolidating with the government, since you won’t get any net benefit to your interest rates, there’s a deeper layer to this. 

Those who have federal loans probably know about some of their built-in protections—such as loan forbearance and various repayment plans. These can be invaluable for certain borrowers who think they might need to use them at some point.

Clearly, there are some things to think about before you refinance. So, when is it the right time to refinance federal student loans?

When Is the Right Time to Refinance Federal Student Loans?

Hopefully the previous section didn’t totally get you off the idea of refinancing federal student loans. While many people will want to avoid this, there are others who will still derive benefit from a student loan refinance. These are a few things to consider:

  • Look at interest rates – As already mentioned, getting a lower interest rate is one of the top perks of refinancing. If you have federal student loans, you should look at two things: your current interest rate and the rate you can get when you refinance. Those with Direct PLUS Loans might find they can materially lower their interest rates by refinancing with a private lender. Furthermore, we’re currently living in a low-rate environment; but this could change at any time due to increasing worries about rising inflation. Locking in a low fixed rate can be a positive on two fronts. You’ll pay less interest over time and you’ll actually benefit from higher inflation since they rate you’re paying will be increasingly lower than the current cost of borrowing. 
  • You feel confident in your ability to repay your loan – Those who feel really good about their financial security might want to guarantee a low interest rate, as this can be more fruitful if you don’t plan on utilizing any federal repayment plans. 
  • You have a good credit score and consistent income – Since refinancing has to be done through a private lender, they’re typically going to have some hard minimum qualifications. This means you’ll have to prove a certain credit score and income level to successfully refinance your loans.

Refinancing your federal student loans isn’t always going to be the right choice. However, certain borrowers can greatly improve their finances by doing this. Make sure you understand when it’s the right time to refinance federal student loans.

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