Basic Federal and Private Refinancing Options

Refinancing can be a great way to lower the rates of your student loans, especially if you took them out between 2006 and 2013 when the interest rates for unsubsidized loans were much higher than the current rates. However, refinancing is not without its drawbacks, so it’s important that you do your research to determine the option that’s best for you and most suitable to your debt and strategy for repaying it.

Federal student loans guarantee fixed low interest rates, but a private loan – which is the end result of refinancing your current loans – may have a variable interest rate and require a credit check, which can prove costly over time for some borrowers. Refinancing also means fewer borrower protections, as many private lenders do not offer deferment or forbearance options and those who do may charge a fee.

A Direct Consolidation loan from the Department of Education is a similar option for refinancing federal loans and typically provides a single monthly payment rather than multiple and a longer repayment term, sometimes up to twenty-five to thirty years. This comes with more accrued interest and may not provide a lower rate, however, so it’s important to weigh the importance of lower monthly payments against how much more you will pay over time.

Income-driven repayment plans (IDR) can also provide lower payments which are calculated based on your monthly income and, like Direct Consolidation, these plans also extend your repayment term. However, you will also pay more over time as a result, and if you lose your IDR eligibility or leave the plan before it’s complete, you will still need to pay back some or all of your unpaid interest due to “interest capitalization.”

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