Refinance Student Loans? Federal vs. Private, and What Changes When You Switch

Refinance ads promise a lower rate and one easy payment. Sometimes that's a great move. Sometimes the loans you'd be refinancing are federal, and switching them changes a lot more than the rate.

Here's how federal and private loans differ, what consolidation and refinancing each do, and how to decide which loans belong where.

Refinancing vs. federal consolidation

These two get mixed up all the time, and they work very differently.

• Refinancing is done by a private lender. It pays off your existing loans and gives you one new private loan, with a rate and term based on its own terms and usually your credit.
• Federal consolidation is a Direct Consolidation LoanA federal loan that combines your federal student loans into one, with one servicer and one monthly payment.. It stays a federal loan.

StudentAid.gov says a Direct Consolidation Loan has a fixed rate for life, set at the weighted average of the loans you combine, rounded up to the nearest one-eighth of one percent. So consolidation simplifies things, but it isn't designed to lower your rate.

Hypothetical example (not a real borrower): you consolidate $10,000 at 5.50% and $20,000 at 6.54%. The weighted average is ($10,000 × 5.50% + $20,000 × 6.54%) ÷ $30,000, which is about 6.19%. Rounded up to the next one-eighth of a percent, the new fixed rate is 6.25%.

For more on the federal side, see should I consolidate my student loans?

Federal vs. private loans at a glance

This summary comes from StudentAid.gov's federal vs. private comparison. StudentAid.gov also notes that interest on both types may be tax deductible. Our guide to the student loan interest deduction covers that.

What you give up when federal loans go private

The CFPB says that when you move federal loans into a private loan, you lose the federal loan's benefits and protections, and the switch can't be reversed. That includes:

• income-driven repayment plans,
• federal deferment and forbearance,
• federal forgiveness programs for public service workers and for teachers in certain low-income schools,
• possibly discharge if the borrower dies or becomes permanently disabled (the CFPB notes many, not all, private lenders offer this), and
• for active-duty servicemembers, the 6% rate cap under the Servicemembers Civil Relief Act on loans taken out before service.

The CFPB's repayment page puts it simply: think carefully before refinancing federal student loans into private loans. A lower rate can still be worth it for some families. It's just a decision to make with the full picture.

When refinancing private loans can help

Private loans don't come with the federal benefits, so refinancing them works differently. The CFPB says refinancing existing private loans might let you:

• lower your interest rate,
• lower your monthly payment by stretching the term (which can raise the total cost), or
• release a cosigner, depending on the new loan's terms.

The CFPB suggests comparing the APR, not just the payment, and watching for variable rates and shorter terms that raise the monthly payment.

Mixed loans? You don't have to choose one path

Plenty of families have both: federal loans from school, a Parent PLUS loan, and a private loan or two. StudentAid.gov notes you don't have to consolidate all your federal loans together, and private loans can't go into a federal consolidation at all.

A common way to think about it: put federal loans on the federal plan that fits your budget, then look at private loans on their own. If you have a Parent PLUS loan, our guide to Parent PLUS repayment options covers the federal side.

Why people get help with this

• Knowing which loans are which. Federal, Parent PLUS and private loans can all look the same on a bank statement.
• Comparing the right numbers. A refinance quote against your best federal plan, not just your current payment.
• Keeping the right protections. Seeing what federal options each loan has before anything changes.
• One plan for the whole family. Parent and student loans, side by side.

Want someone to handle it with you? Call (877) 444-0912.

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