For more than three years, federal student loans have had 0% interest rates and no required payments. Refinancing federal loans into a private loan during this time would have been an obvious mistake.
On August 30, the payment and interest break officially ends. Interest will start on September 1 and the first invoices will be due in October. Many federal borrowers may be considering private loans.
In theory, the approach makes sense. Refinancing into a private loan can mean lower interest rates and a faster repayment period.
Unfortunately, things are a bit more complicated. Refinancing could be a mistake, even if it means living with higher interest rates.
The Basics of Refinancing Federal Student Loans into a Private Loan
All federal borrowers are treated the same when new student loans are issued. Borrowers with excellent credit ratings or high earning potential do not receive lower rates or special treatment.
Private lenders take advantage of this situation. They can target high earners with strong credit histories and offer lower interest rates.
When a borrower refinances, the refinance lender creates a brand new student loan. The funds from this loan are used to repay some or all of the borrower’s other student loans.
The old debt is eliminated and replaced by a new loan and new terms of repayment. The feds get their loan back, the lender gets a new customer, and the borrower gets a lower interest rate.
On paper, everyone wins.
In practice, it is not so easy. Refinancing can be a good deal for the lender and the government, but it’s not necessarily the best option for the borrower.
One-Time Student Loan Forgiveness
As of this writing, the Supreme Court is weighing whether or not to approve President Biden’s plan to forgive up to $20,000 per federal student loan borrower.
If a borrower refinanced their federal loans into a private loan, they could miss this discount.
The solution to this particular problem is simple. If you qualify for a $10,000 forgiveness, you must ensure that $10,000 of your federal debt remains with the government.
Is more forgiveness on the way? Without knowing the future, it is impossible to say whether more debt cancellations are coming or not.
Unless the political winds change or the makeup of Congress changes, further debt cancellation seems unlikely.
The new repayment plan could change the math
Another variable to consider before refinancing is the new repayment plan being developed.
It’s entirely possible that a new plan will result in lower monthly payments and better REPAY the interest subsidy.
Biden’s new repayment plan could do Sorry IDR or PSLF even more attractive.
When immediate refinancing makes sense
For some borrowers, waiting a decade or two for their student loan to be forgiven doesn’t make sense – their loans will be paid off long before then.
For these borrowers, paying off federal student debt is a certainty. It’s just a matter of speed and how much they spend on interest.
If you fall into this category, refinancing once the government starts charging interest again might make sense.
Refinancing strategy before the restart
If you’re receiving 0% interest on your federal loans, it doesn’t make sense to refinance them until the end of the interest freeze on 8/31/23.
However, it is possible to lock in a rate before the end of the freeze. Most quotes are valid for thirty days. Secure the quote, but don’t finalize the process until the freeze is over.
It also allows you to recheck rates just before the freeze ends. If rates drop at the end of August, you may get a better rate. If they go up, you’ll be glad you started early.
Sherpa tip: Don’t forget the double refinance option. Unlike mortgage refinancing, there are no transaction fees for refinancing student loans multiple times.
If rates go down in the future, you can always refinance again.
The best rates in June 2023
If you’re looking for the lowest possible rate, 5-year fixed rate loans are a great option.
The following lenders currently advertise the best rates in this category:
However, the best loans currently available might be the 20-year fixed rate loans. Interest rates are slightly higher, but they have significantly lower monthly payments, which means more financial flexibility. A longer loan can also improve your debt to income ratio.
Currently, the following lenders are advertising the best 20-year fixed rate loans: