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Amid Federal Loans Chaos, Here Are Five Reasons to Consider a Student Loan Refinance
Amid Federal Loans Chaos, Here Are Five Reasons to Consider a Student Loan Refinance
October 06, 2021 / Nadav Shemer
Amid Federal Loans Chaos, Here Are Five Reasons to Consider a Student Loan Refinance
October 06, 2021 / Nadav Shemer

If you have federal student loans, then there’s a good chance you’ll be transferred to a new loan servicer at the end of this year.

Navient Corporation just announced that it has agreed to transfer more than six million student loans to Maximus Federal Services, Inc., subject to approval from the U.S. Department of Education Office of Federal Student Aid. Navient joins two other federal loan servicers – PHEAA (operating as FedLoan Servicing) and Granite State Management and Resources (GSMR) – in ending its contracts at the end of 2021. The three companies together service around 16 million federal loans, or 37% of all federal loans.

This latest news has again spotlighted the problems surrounding student loan servicing companies, many of which have been accused of mismanagement and failing to fulfill their obligations to student borrowers. Since 2011, tens of thousands of borrowers have filed complaints with the Consumer Financial Protection Bureau and other government agencies about obstacles they faced in repaying student loans serviced by Navient, according to the Philadelphia Inquirer. Columnists in Forbes and other media outlets have argued that Navient ended its federal loans contract in order to escape oversight from the Department of Education and Congress.

Amid the chaos surrounding federal loans, we thought now would be a good time to list the top five reasons to consider a student loan refinance from a private lender.

1. Reduce your interest rate

Federal student loan interest rates are set by Congress each year and are based on 10-year Treasury notes plus a fixed increase. The rates are standardized, meaning that everyone who qualifies for a federal loan in a given year pays the same rate, regardless of their credit score.

Since 2006, all federal loans have had fixed interest rates, ranging from a high of 6.80% (for direct subsidized loans in the academic years starting 2006 and 2007, and for direct unsubsidized loans in the academic years starting 2006 to 2012) to a low of 2.75% for both subsidized and unsubsidized loans in the 2020-21 academic year. Between 1988 and 2006, rates for direct student loans (then referred to as Stafford loans) were variable, and went as high as 8.25% in the mid-to-late 1990s.

Today, private student loan providers offer refinancing at variable rates ranging from 0.99% to 11.98% and fixed rates ranging from 2.99% to 12.99%. These lenders can refinance private student loans, federal student loans, or a combination of the two. If you have strong credit, then there’s a good chance you’ll qualify for a substantially lower rate than the one you currently pay on your federal loan.

2. Reduce your monthly payment or total interest payment

Reducing your interest rate is one way to reduce your monthly payment and the total amount you pay in interest over the life of your loan(s). Another way of reducing your monthly payment and/or total interest paid is by changing the repayment term on your loan.

The standard repayment on a federal loan is 10 years for loan amounts under $7,500. Extended repayment is offered on higher loan amounts, e.g. 12 years for $7,500 to $10,000, 30 years for cumulative loan amounts of $60,000 or more. Other federal loan repayment options include graduated repayment, which starts off with lower payments and increases every two years, and income-contingent repayment (and its variants income-sensitive repayment and income-based repayments), based on the borrower’s income and the total amount of debt.

Private student lenders give you the freedom to choose which repayment term is most suitable for you. Repayment terms for private student loan refinancing typically vary from 5-20 years. Shorter terms equal higher monthly payments but less interest paid over the life of the loan, while longer terms equal lower monthly payments but more interest paid over the life of the loan. The choice is yours.

3. Combine your loans into a single monthly payment

Student loan refinancing can be used for one or more loans and a combination of federal and/or private loans. When you refinance all your loans into one loan, you get a single point of contact (the lender) instead of potentially multiple contacts (e.g. Navient, Maximus or other loan servicing companies for your federal loans and private lenders for each private loan).

The main benefit to having a single monthly payment for your student debt is that it’s much simpler than having multiple payments. With a single payment, there’s no more having to keep track of all your debts and no more having to decide which ones to prioritize. Having a single payment reduces your stress.

4. Private lenders are more accountable

Navient was the subject of thousands of complaints over a period of at least a decade without ever really being held to account. PHEAA settled a lawsuit with Massachusetts in early 2021 over allegations that it had prevented borrowers from accessing federal loan forgiveness programs, but it insisted that the settlement carried “no admission of wrongdoing.” GSMR was also the subject of dozens of complaints from consumers.

When you take out federal student loans, you are automatically assigned a loan servicer to manage your payments. Later on, you have the ability to switch to a new servicer through a student loan consolidation. If you’re unhappy with your current servicer, then consolidation is certainly an option. But if the recent sagas surrounding Navient and others have shown us anything, it’s that federal loan servicers are rarely held to account for actions that might be harmful to borrowers.

Private student lenders are capable of making mistakes or unfairly treating borrowers. However, the consequence of having to compete with other lenders is that they generally behave well. No private lender could absorb thousands of complaints and still be in business. At the end of the day, the private lenders that offer the best customer service and the lowest interest rates attract the most customers. When you refinance with a private lender, you have the freedom to shop around and choose the best one for you.

5. It’s the only way of refinancing

If you’re struggling to pay your federal student loans or just want your payment to be simpler, then you have the option of consolidating your debts or applying for student loan or cancellation forgiveness programs. Forgiveness programs are available to various borrowers, including: people with total and permanent disability; employees of federal, state, or local government organizations or of qualifying non-profits; and people who have taught full-time in a low-income school or education service agency for a minimum five consecutive years.

If your goal is to reduce your interest rate or monthly payments, then the only way to do this is by refinancing, and the only way to refinance is with a private lender. In most cases, private lenders allow refinancing of private and/or federal loans, combining all your loans into a single monthly payment with a (hopefully) lower interest rate.

Bottom line

Student loan refinancing offers many advantages over continuing to pay your federal loans, but no two student loan refinance providers are equal. Before taking out a student loan refinance, shop around between the top providers to find the ones that are suitable for you and then apply to each lender for a free rate quote before making a final decision.

By Nadav Shemer
Nadav Shemer specializes in business, tech, and energy, with a background in financial journalism, hi-tech and startups. Nadav writes for He enjoys writing about the latest innovations in financial services and products.
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