Fedloan servicing refinance and consolidation options

Consolidation and Refinancing with Fedloan Servicing (myfedloan)

Michael Lux Blog, Consolidation, Refinance, Strategy, Student Loans 0 Comments

Fedloan Servicing, also known as myfedloan, is one of the largest servicers of federal student loans.  Though Fedloan Servicing has been entrusted by the government to manage billions of dollars in student loans, they often fall short of minimal quality standards expected by many borrowers and taxpayers.  The challenges of working with myfedloan make coming up with a strategy for student loan refinancing and consolidation difficult.

The good news is that even though Fedloan Servicing has its flaws, consolidation and refinancing can still be easily accomplished.  The real question is whether or not student loan refinancing or consolidation is a good idea.

Refinancing vs. Consolidation

The terms student loan refinancing and consolidation are often used interchangeably.  In both cases old loans are paid off in full, and the borrower agrees to pay off a new loan that was used to pay off the old loans.

The key item to understand is the difference between federal student loan consolidation and refinancing with a private lender.  With Federal Student Loan Consolidation, existing federal student loans are paid off and a new large federal loan remains.  This process does not lower interest rates, but it can help certain loans become eligible for desirable repayment plans and student loan forgiveness programs.  All federal borrowers are eligible to consolidate and no credit check is required.

Private student loan refinancing involves finding a lender, such as SoFi or Laurel Road, who is willing to pay off existing student loans.  The major perk of this process is that borrowers are often able to refinance at lower interest rates.  Some of the best refinance rates start well below 3%, which can be a huge savings for borrowers with large balances or high interest rates.  The downside to private student loan refinancing is that borrowers need a decent credit score and income in order to qualify.  The danger with privately refinancing FedLoan Servicing loans is that borrowers lose federal loan perks such as income-driven repayment plans and loan forgiveness.

Federal Student Loan Consolidation with myfedloan

The federal student loan consolidation process can be done almost entirely independently from Fedloan servicing.  The federal government handles all student loan consolidation requests through studentloans.gov.  The application itself takes no more than 30 minutes, but the actual consolidation process can take weeks or even months.  During this time the Department of Education will gather all existing loan information and prepare for a final payoff.

There is a lot of repayment strategy that goes into the decision of wether or not you should consolidate your federal loans.  Because interest rates cannot be improved by loan consolidation, the major question is whether or not it helps with program eligibility.  If you have FFEL loans, consolidation can help get them eligible for Public Service Loan Forgiveness.  However, if you have already started making payments towards PSLF, consolidation can reset the forgiveness clock.

For some borrowers, federal direct consolidation of the loans with myfedloan is essential.  For others, it would be a mistake.  Be sure to investigate this option carefully before making any decisions, because once the consolidation process is completed, it cannot be undone.

Refinancing Student Loans with Fedloan Servicing

Opting to go with a private lender for refinancing of your debt with myfedloan is a high risk decision.  If it goes well, you spend dramatically less on interest and pay off the loan much faster.  It can even free up cash each month.  The risk is that a job loss or reduction in pay makes it impossible to keep up with payments.  While federal loans have protections such as income-driven repayment plans, the private lenders are much less forgiving.

The roll of myfedloan in a private student loan refinancing is minimal.  Most of the work is done by the new lender refinancing the loan as myfedloan doesn’t actually offer any refinancing services.  That new lender will determine the final payoff amount for the loans with Fedloan Servicing, and then cut them a check.  Myfedloan has no say in whether or not a borrower can refinance, and there are no prepayment penalties for federal student loans.

There are two keys to the private refinance process.  First, it is important to determine whether or not it is a good idea.  If repayment will be a challenge, borrowers may be better off living with the higher interest rates of the federal loans.  Second, getting approval from a lender for the refinance process can be a challenge for borrowers with less than perfect credit or low income relative to their debt.  The good news is that there are currently 18 different companies providing refinancing services.

Finally, it is important to remember that like federal consolidation, a private refinance cannot be undone.  Once the loans with myfedloan are paid in full, there is no switching back to your old lender.

Why would a private lender payoff my Fedloan Servicing Debt?

To many, it may seem like a too good to be true scenario.  Why would a lender pay off high interest debt and allow repayment at much lower interest rate?

The lender motivation comes down to risk.  The interest rate with myfedloan is set by Congress at the time the federal loan is first borrowed.  School, area of student, and employment information are not considered.  Because all borrowers are treated the same, the resulting interest rates are a good deal for some, and a bad deal for others.  The private lenders are competing for the borrowers with good jobs and credit scores.  These borrowers are much less risk, so they can offer the loans with lower interest rates and still make money.

Next Steps

If a refinance or consolidation of your Fedloan Servicing loans might be in the future, there are three critical questions to ask yourself.

  1. Will I gain anything by going through federal direct consolidation?
  2. Am I confident I can repay my debt without federal protections like loan forgiveness?
  3. Will a student loan refinance company offer me a better rate?