A lower interest rate is typically the key reason to consider refinancing. It is true that a lower interest rate will save you money in the long run and could lower your monthly payments. But that’s not the only consideration. Turning federal student loans into private student loans with refinancing will result in irreversible consequences. This article summarizes the key tradeoffs for that lower interest rate.

1) Federal Student Loans Have Stronger Consumer Protections

Private student loans do not offer consumer protections as good as those available in the federal student loan system. What so many borrowers don’t realize is that while private loans offer some similar protections in their contracts, the provisions are generally “discretionary,” which means the lender determines if they are allowed.    

2) No More Loan Forgiveness or Income-Driven Repayment

Income-driven repayment plans like IBR and PAYE, teacher loan forgiveness, Perkins loan cancellation, and Public Service Loan Forgiveness are all unique and substantial federal student loan repayment programs that can deliver remarkable relief to those who qualify. If you refinance, you will forever lose access to these programs and the many benefits.

3) Variable Interest Rates

The majority of federal student loans originated over the last decade have fixed interest rates (i.e., the rate never changes over the loan period). Many private student loans offer the opposite. They have variable interest rates which can increase over time.

4) Origination Fees

Some private student loan refinancing companies charge new fees to refinance. This is called a “loan origination fee”. These fees are added to your new loan balance. You then have to repay that fee – with interest – along with the rest of your refinanced loan balance.

5) You Might Need a Cosigner

The private student loan refinancing loans offering the lowest interest rates and other terms are designed for borrowers with very high incomes and great credit scores. And even if both criteria are solid for you, you could still need a cosigner, particularly if you’re refinancing a large balance of loans.