4 Signs You’re Ready to Refinance Federal Student Loans

Federal student loan perks — such as deferment or forgiveness — can be crucial for some borrowers. But if you don’t need them, you might want to consider refinancing with a private company.

When you refinance your student loans, a private lender replaces your current loans with a new one at a lower interest rate, potentially saving you big bucks over time. Grads with good or excellent credit and a stable income have the best shot at refinancing.

Beyond those requirements, if you can check off these four boxes, you may be ready to refinance federal student loans.

✔︎ Your potential savings make refinancing worthwhile.

Borrowers whose federal loans have interest rates of 6.5% or higher have the most to gain from refinancing, since they’ll receive the largest interest rate reduction if they meet lenders’ requirements.

“The first thing [borrowers] need to consider is whether or not there is going to be a real, tangible benefit,” says Chad Pastorius, manager of strategic planning at the Rhode Island Student Loan Authority, a nonprofit student lender that offers refinancing.

Here’s an example of how it could work: Say you have a $30,000 federal loan at a 6.8% interest rate. You’ll pay $345.24 per month for 10 years and $11,428.92 in interest overall on the standard repayment plan. But two years into repayment, once you’ve developed excellent credit and solid income relative to your debt, you might qualify to refinance. If you do, your new lender will pay off your $25,508.40 federal loan balance and issue you a new eight-year private loan at a lower interest rate — for example, 4%.

Your new monthly payment will be $310.93, a savings of about $34 a month. You’ll also see a big difference in overall interest savings: You’d have $7,634.73 in interest left to pay on the 10-year loan, compared to $4,340.78 in total interest on your new eight-year loan. That means you’ll save $3,293.95 during the next eight years by refinancing.

✔︎ Your job won’t qualify you for student loan forgiveness.

The government offers certain benefits exclusive to federal loans. One of the most valuable is federal student loan forgiveness, a program which lets you get rid of your loans early if you meet specific criteria.

Public Service Loan Forgiveness, for instance, will dissolve your remaining federal loan balance if you work in the public sector for 10 years. Government employees, teachers, police officers and AmeriCorps volunteers qualify, among others. Teachers and Perkins loan borrowers can take advantage of additional programs that offer forgiveness after just five years.

Borrowers who refinance give up access to these programs. But that will concern you less if you work for a private company and wouldn’t be able to qualify for forgiveness. You can even refinance to a shorter repayment term — say, five or eight years — so you eliminate your loans faster and pay less interest overall.

✔︎ You’re able to to afford your loans without income-driven repayment.

The government offers several income-driven student loan repayment plans, which calculate your monthly payment as a percentage of your earnings. The newest, most generous plan, REPAYE, allows all federal direct loan borrowers to pay 10% or less of their salary every month toward loans — as little as $0 if they earn no income — and offers forgiveness after 20 years, or 25 for those with grad school loans.

REPAYE and other income-driven plans are best for borrowers who have a lot of debt compared to their earnings or who work seasonally and can’t predict how much they’ll make.

“Those programs can really provide borrowers with a lot of value if their financial circumstances were to change,” Pastorius says.

But if you have a steady income, and it’s high relative to your debt, you may not need an income-driven repayment plan. RISLA, for instance, welcomes refinancing customers who have debt loads that are less than half of their annual incomes, Pastorius says. In those cases, refinancing could save you thousands.

✔︎ You don’t plan to defer your subsidized loans.

It’s hard to predict the future, but if there’s a good chance you’ll want an advanced degree, you may want to keep your loans federal — especially if they’re subsidized.

The government pays the interest on subsidized loans when they’re in deferment, meaning a borrower has temporarily postponed payments. You can apply for deferment if you go back to school full time, are between jobs or have other qualifying circumstances.

It’s worth doing the calculation, though, Pastorius says. A much lower interest rate on a refinanced loan could still save you more money over time, even if you’re paying the interest on your refinanced loan while you’re in school.

If you’ve already gone to grad school, you have no plans to apply or you only have unsubsidized loans, giving up interest-free deferment doesn’t have to keep you from refinancing.

When you’re ready to refinance

NerdWallet has partnered with the marketplace Credible, which lets you compare offers from up to eight refinancing lenders at a time. Borrowers can enter initial loan information below to see how much they could save, then fill out a full application on Credible’s website to view real offers from lenders.

Refinancing companies outside Credible’s marketplace, including SoFi, Earnest and Darien Rowayton Bank, may also be worth considering. Shopping around for a refinanced loan — all within a 30-day period, so it doesn’t negatively affect your credit — can help you decide if refinancing is worth it for you, once you know you won’t use the benefits federal loans provide.

Brianna McGurran is a staff writer at NerdWallet. Email: bmcgurran@nerdwallet.com. Twitter: @briannamcscribe.