Should You Refinance Federal Student Loans Now That Payments Are Back?

There wasn’t much of a case for refinancing federal student loans from March 2020 until September 2023: Payments and interest accrual were paused, meaning virtually every borrower would’ve been worse off with a private lender.

Now that payments are back, and interest is adding up again, borrowers looking to refinance their federal debt as a way to save money are finding some bad news: For many people with federal student loans, the refinance math doesn't add up right now.

When borrowers refinance student loans, it's generally to achieve better loan terms, whether that means a lower interest rate or a payment timeline that aligns with their ability to repay.

But current refinancing rates are relatively high, sometimes even higher than what federal borrowers got when they first took out their loans. In that case, it's better to keep the federal loan.

Even if you can improve your interest rate, there are major potential downsides to refinancing federal student loans. When you switch to a private lender (a bank, a credit union or a commercial business) you’re giving up federal student loan protections.

“You're going to have more flexibility with federal student loans if things aren't going well — if you lose a job, if you have an illness, if you have something that interrupts your income stream,” says Tana Gildea, principal at the Atlanta-based wealth management firm Homrich Berg.

Before federal student loan payments were paused at the start of the pandemic, there was more of a value proposition to refinancing and it was therefore more common, experts say. For example, average fixed rates for borrowers refinancing with good credit were around 4% in the months leading up to the pandemic.

Today’s loan refinance rates are significantly higher, making it more difficult to find substantial enough savings through refinancing to justify the loss of the federal protections, including loan forbearance and the ability to access federal income-driven repayment plans.

Justin Horsch, consultant at Student Loan Planner, says you can quickly find yourself in financial trouble if you fall behind on loan payments you owe to private lenders. "It’s far more rigid, and they're going to say 'Hey, no, you signed up for this plan, you need to pay."

You also won’t be eligible for any federal student loan forgiveness programs like the Public Service Loan Forgiveness (PSLF) program if you refinance out of the federal system.

And even though the Supreme Court struck down the Biden administration’s major debt cancellation plan, you won't be eligible for debt relief if there's a successful attempt at loan forgiveness in the future.

For many of these reasons, Howard Dvorkin, chairman of Debt.com, usually discourages refinancing federal student loans, especially right now with the possibility of Congress or the executive branch improving benefits for federal borrowers.

“You don't take a private loan to pay off a federal student loan, and the reason being is that if you do that, there may be some forgiveness coming down the road, there may be some reduction in interest coming down the road,” he says.

Should you refinance federal student loans?

The possible benefits of refinancing a student loan include lowering your interest rate or reducing your monthly payments by extending the duration of your loan — but typically not both. That's because the lowest interest rates are usually reserved for the shorter-term loans.

If you have undergrad debt and your loans are federal, the question of whether you should refinance is pretty simple: The answer right now is no, you likely can't beat your current interest rate.

Borrowers who have higher interest debt from grad school and high credit scores might be able to get a better rate refinancing. But it's rare: Horsch says about 1% or 2% of the borrowers he’s met with since July have been examples of where refinancing out of the federal system made sense.

When the Federal Reserve’s benchmark interest rate was low, there was greater likelihood that federal student loan borrowers could get lower rates by refinancing with private lenders. For much of 2021, refinance companies were offering variable rates that started around 2%. Now they're more than double that.

Refinance companies are currently offering loans with annual percentage rates (APRs) between 4.9% to 14.5% APR, according to loan marketplace Credible.

For comparison, the fixed interest rate for federal undergraduate loans is 5.50%, which is the highest it’s been in the past decade. (The rate for federal graduate loans is 7.05%.)

"The [federal] interest rates that a lot of people have gotten over the past 5 to 10 years are just as good if not better than the interest rate environment that we're in right now,” he says.

Horsch says he's seen a small uptick in interest in student loan refinancing since the payment pause ended.

The attention around the Biden administration's generous new repayment plan, which will lower what many borrowers owe each month, also drove down interest in refinancing. According to the Department of Education, 1.8 million of the people who have enrolled in the plan, called SAVE, have never been in an income-driven repayment plan before.

“The new SAVE plan has just made it significantly more beneficial to stay in the federal system, along with the rising interest rates. We're just seeing a lot, a lot, a lot less people refinance right now because of those two factors that play off each other,” Horsch says.

In general, with income-driven repayment plans offered by the federal government, your monthly payments will drop if your income drops, and you won’t have to pay any fees for the adjustment. Whereas with private loans, if you encounter financial hardship, you could find yourself at the mercy of your lender. And your credit could take a hit if you can’t pay, among other consequences.

Still, even with new benefits and high interest rates, the end of the payment pause may be spurring some federal loan borrowers to refinance, according to DBRS Morningstar.

"Certain lenders have stated to [us] that refi volumes have picked up since the end of federal student loan payment freeze, in addition to borrowers having more certainty about federal student loan forgiveness," says Jon Riber, a senior vice president at DBRS Morningstar.

Riber expects refinancing volumes to pick up more when rates stabilize or decrease. And that's what borrowers should keep in mind: While it’s not the best time to refinance right now, student loan rates likely won’t be this high for long. If the Fed lowers interest rates in 2024, expect refinance rates to come down as well. Because federal student loan rates have been high for more than a year, people who initiated loans at those high rates could be candidates for refinancing down the road.

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