For over three years, federal student loans have had 0% interest rates and no mandatory payments. Refinancing federal loans into a private loan during this time would have been an obvious mistake.
On August 30th, the payment and interest pause officially ends. Interest will start on September 1st, with the first bills due in October. Many federal borrowers may be planning to jump ship to private loans.
In theory, the approach makes sense. Refinancing into a private loan can mean lower interest rates and a quicker payoff timeline.
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 get treated equally when new student loans are issued. Borrowers with excellent credit scores or high-earning potential do not get lower rates or special treatment.
Private lenders take advantage of this situation. They can target high-earners with a strong credit history and offer lower interest rates.
When a borrower refinances, the refinance lender creates a brand-new student loan. The funds from that loan are used to pay off some or all of the borrower’s other student loans.
The old debt is eliminated and replaced with a new loan and new repayment terms. The federal government gets their loan back, the lender gets a new customer, and the borrower receives a lower interest rate.
On paper, everybody wins.
In practice, it isn’t quite that easy. Refinancing might be a good deal for the lender and the government, but it isn’t necessarily the best option for the borrower.
One-Time Student Loan Forgiveness
At the time 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 out on this forgiveness.
The solution to this particular problem is straightforward. If you might qualify to have $10,000 forgiven, you should make sure that $10,000 of your federal debt stays with the government.
Is more forgiveness on the way? Without knowing the future, it’s impossible to say whether or not more debt cancellation is coming.
At present, Republicans appear uniformly opposed to debt cancellation, and some, but not all, Democrats support the measure.
Unless the political winds change or the makeup of Congress changes, further debt cancellation appears unlikely.
New Repayment Plan Could Change Math
Another variable to consider before refinancing is the new repayment plan currently in development.
It’s entirely possible that a new plan could result in lower monthly payments and an improved REPAYE interest subsidy.
Biden’s new repayment plan could make IDR Forgiveness or PSLF even more appealing.
When an Immediate Refinance Makes Sense
For some borrowers waiting a decade or two for student loan forgiveness doesn’t make sense — their loans will be paid off long before that time comes.
For these borrowers, repaying federal student debt is a certainty. It is just a question of how fast it happens and how much they spend on interest.
If you fall into this category, refinancing once the government starts charging interest again could make sense.
Refinance Strategy Before the Restart
If you are getting charged 0% interest on your federal loans, it doesn’t make sense to refinance them before the interest freeze ends on 8/31/23.
However, it is possible to lock in a rate before the freeze ends. Most rate quotes are good for thirty days. Secure the rate quote, but don’t finalize the process until the freeze ends.
This also allows you to recheck rates just before the freeze ends. If rates drop in late August, you can get a better rate. If they go up, you will be glad you started early.
Sherpa Tip: Don’t forget about the double refinance option. Unlike refinancing a mortgage, there are no transaction costs to refinancing student loans multiple times.
If rates drop in the future, you can always refinance again.
The Best Rates in April 2024
If you are looking for the lowest rate possible, the 5-year fixed-rate loans are an excellent option.
The following lenders currently advertise the best rates in this category:
| Rank | Lender | Lowest Rate | Sherpa Review |
|---|---|---|---|
| T-1 |  | 5.19%* | Splash Financial Review |
| T-1 |  | 5.19% | Earnest Review |
| 3 |  | 5.48% | ELFI Review |
However, the best loans presently available could be the 20-year fixed-rate loans. The 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.
At present, the following lenders advertise the best 20-year, fixed-rate loans:
| Rank | Lender | Lowest Rate | Sherpa Review |
|---|---|---|---|
| 1 | | 6.08%* | Splash Financial Review |
| 2 | | 6.64% | ELFI Review |
