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Refinancing federal student loans can either help you pay down your loans sooner (by shortening your term) or lower your monthly payment (by extending your term). However, when you refinance federal student loans with a private lender, you lose federal benefits and protections.

Refinancing is not a simple decision. Keep reading to learn more about federal student loan refinancing and whether or not it’s right for you.

What Is Federal Student Loan Refinancing?

If you graduated with student loans, you may have a combination of private and federal student loans. The latter are loans funded by the federal government. Direct Subsidized Loans and Direct PLUS Loans are both examples of federal student loans.

Interest rates on federal student loans are fixed and set by the government annually. The current rate for the 2024-25 school year is 6.53% for undergraduate students. Private student loan rates are set by individual lenders. If you’re unhappy with your current interest rates, you may be able to refinance your student loans with a private lender and a new — ideally lower — interest rate.

Recommended: Types of Federal Student Loans

Can I Refinance My Federal Student Loans?

It is possible to refinance federal student loans with a private lender. However, you lose the benefits and protections that come with a federal loan, like income-based repayment plans and public service-based loan forgiveness. On the plus side, refinancing may allow you to pay less interest over the life of the loan and pay off your debt sooner.


💡 Quick Tip: Ready to refinance your student loan? With SoFi’s no-fee loans, you could save thousands.

How Are Refinancing and Consolidation Different?

Student loan consolidation and student loan refinancing are not the same thing, but it’s easy to confuse the two. In both cases, you’re signing different terms on a new loan to replace your old student loan(s).

Consolidation takes multiple federal student loans and bundles them together, allowing borrowers to repay with one monthly bill. Consolidation does not typically get you a lower interest rate (you’ll see why in the next paragraph). Refinancing, on the other hand, rolls your old federal and private loans into a new private loan with a different loan term and interest rate.

When you consolidate federal student loans through the Direct Consolidation Loan program, the resulting interest rate is the weighted average of the original loans’ rates, rounded up to the nearest one-eighth of a percent. This means you don’t usually save any money. If your monthly payment goes down, it’s usually the result of lengthening the loan term, and you’ll spend more on total interest in the long run.

When you refinance federal and/or private student loans, you’re given a new interest rate. That rate can be lower if you have a strong credit history, which can save you money. You may also choose to lower your monthly payments or shorten your payment term (but not both).

Recommended: Student Loan Consolidation vs Refinancing

What Are Potential Benefits of Refinancing Federal Student Loans?

Potential Savings in Interest

The main benefit is potential savings. If you refinance federal loans at a lower interest rate, you could save thousands over the life of the new loan.

Plus, you may be able to switch out your fixed-rate loan for a variable rate loan if that makes more financial sense for you (more on variable rates below).

Lower Monthly Payments

You can also lower your monthly payments. That typically means lengthening your term and paying more in interest overall. (Shortening your term usually results in higher monthly payments but more savings in total interest.)

Streamlining Repayments

Refinancing multiple loans into a single loan can help simplify the repayment process. Instead of multiple loan payments with potentially different servicers, refinancing allows you to combine them into a single monthly payment with one lender.

What Are Potential Disadvantages of Refinancing Federal Loans?

When you refinance federal loans with a private lender, you lose the benefits and protections that come with government-held student loans. Those benefits fall into three main categories:

Deferment / Forbearance

Most federal loans will allow borrowers to put payments on hold through deferment or forbearance when they are experiencing financial hardship. Student loan deferment allows you to pause subsidized loan payments without accruing interest, while unsubsidized loans will still accrue interest.

Student loan forbearance allows you to reduce or pause payments, but interest usually accrues during the forbearance period. Some private lenders do offer forbearance — check your lender’s policies before refinancing.

Special Repayment Plans

Federal loans offer extended, graduated, and income-driven repayment plans (such as Pay As You Earn, or PAYE), which allow you to make payments based on your discretionary income. It’s important to note that these plans typically cost more in total interest over the life of the loan. Private lenders do not offer these programs.

Another plan called REPAYE was phased out and replaced by the SAVE Plan, which promises to cut payments in half for low-income borrowers. According to the Department of Education, SAVE is the most affordable repayment plan, with some borrowers not having to make payments at all.

Student Loan Forgiveness

The Supreme Court has blocked President Joe Biden’s mass forgiveness plan for federal student loan borrowers. However, other loan forgiveness options are still available.

•   Public Service Loan Forgiveness (PSLF). Teachers, firefighters, social workers, and other professionals who work for select government and nonprofit organizations may apply for this program. Changes made by the Biden Administration will make qualifying easier — even for borrowers who were previously rejected. Learn more in our guide to PSLF.

•   Teacher Loan Forgiveness. This program is available to full-time teachers who complete five consecutive years of teaching in a low-income school. Find out more in our Teacher Loan Forgiveness explainer.

•   Income-Based Repayment Plans. With some repayment plans, you may be eligible for forgiveness if your student loans aren’t paid off after 20 to 25 years (and in some cases under the new SAVE plan, after 10 years).

Private student loan holders are not eligible for these programs.

When Should You Consider Refinancing Your Student Loans Again?

You can refinance your student loans for a second time, and in fact, there is no limit to how many times you can refinance. Each time you refinance, you essentially take out a new loan to pay off the old one, ideally with better terms. However, it’s crucial to ensure that refinancing again is beneficial for your financial situation. Here are some key considerations:

Improved Financial Situation

•   Credit Score: If your credit score has improved, you may qualify for a lower interest rate.

•   Income: A higher or more stable income can make you eligible for better loan terms.

•   Debt-to-Income Ratio: A lower ratio can also help secure more favorable terms.

Market Conditions

•   Interest Rates: If market interest rates have decreased since your last refinancing, you might get a better rate.

•   Promotional Offers: Keep an eye out for new promotional rates or special offers from lenders.

Loan Terms

•   Shorter Terms: Refinancing to a shorter loan term can reduce the overall interest paid.

•   Extended Terms: If you need lower monthly payments, extending the loan term can provide relief, though it may increase the total interest paid over the life of the loan.

•   Consolidation: Refinancing multiple loans into one can simplify your payments and possibly offer better terms.

FAQs on Refinancing Your Federal Loans

Who Typically Chooses Federal Student Loan Refinancing?

Many borrowers who refinance have graduate student loans, since federal unsubsidized and Grad PLUS loans have historically offered less competitive rates than federal student loans for undergraduates.

In order to qualify for a lower interest rate, it’s helpful to show strong income and a history of managing credit responsibly, among other factors. The one thing many refinance borrowers have in common is a desire to save money.

Do I Need a High Credit Score to Refinance Federal Loans?

Generally speaking, the better your history of dealing with debt (illustrated by your credit score), the lower your new interest rate may be, regardless of the lender you choose. While many lenders look at credit scores as part of their analysis, however, it’s not the single defining factor. Underwriting criteria vary from lender to lender, which means it can pay to shop around.

For example, SoFi evaluates a number of factors, including employment and/or income, credit score, and financial history. Check here for current eligibility requirements.

Are There Any Fees Involved in Refinancing Federal Loans?

Fees vary and depend on the lender. That said, SoFi has no application or origination fees.


💡 Quick Tip: Enjoy no hidden fees and special member benefits when you refinance student loans with SoFi.

Should I Choose a Fixed or Variable Rate Loan?

Most federal loans are fixed-rate, meaning the interest rate stays the same over the life of the loan. When you apply to refinance, you may be given the option to choose a variable rate loan.

Here’s what you should know:

Fixed Rate Refinancing Loans Typically Have:

•   A rate that stays the same throughout the life of the loan

•   A higher rate than variable rate refinancing loans (at least at first)

•   Payments that stay the same over the life of the loan

Variable Rate Refinancing Loans Typically Have:

•   A rate that’s tied to an “index” rate, such as the prime rate

•   A lower initial rate than fixed rate refinancing loans

•   Payments and total interest costs that change based on interest rate changes

•   A cap, or maximum interest rate

Generally speaking, a variable rate loan can be a cost-saving option if you’re reasonably certain you can pay off the loan somewhat quickly. The more time it takes to pay down that debt, the more opportunity there is for the index rate to rise — taking your loan’s rate with it.

What Happens If I Lose My Job or Can’t Afford Loan Payments?

Some private lenders offer forbearance — the ability to put loans on hold — in cases of financial hardship. Policies vary by lender, so it’s best to learn what they are before you refinance. For policies on disability forbearance, it’s best to check with the lender directly, as this is often considered on a case-by-case basis.

Do Refinance Lenders Allow Cosigners / Cosigner Release?

Many private lenders do allow cosigners and some allow cosigner release options. SoFi allows cosigners, but no option for cosigner release for refinanced student loans. However, if you have a cosigner and your financial situation improves, you can apply to refinance the cosigned loan under your name alone.

The Takeaway

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

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Although you may have never heard the term before, core deposits are a basic concept in retail banking. When customers (probably just like you) deposit funds in a checking, savings, or money market account, financial institutions consider this money to be core deposits. Financial institutions then use core deposits to loan money to other consumers and generate profits through interest-bearing investments. So, generally speaking, growing core deposits helps institutions better leverage these funds and earn profits.

Though this may sound like technical knowledge, the truth is that understanding how core deposits work and why they are important can help you better navigate your banking life.

What Is a Core Deposit?

Simply put, core deposits are a stable source of capital for financial institutions like banks and credit unions. It’s money that consumers deposit and that the bank then turns around and uses elsewhere. For instance, those funds could be part of a loan. Core deposits usually include individual savings accounts, business savings accounts, and money market accounts.

In addition, financial institutions may offer incentives to encourage consumers to deposit money in a specific account to increase their core deposits. Building their capital with core deposits can have an array of advantages for a financial institution, including boosting revenue.

💡 Quick Tip: An online bank account with SoFi can help your money earn more — up to 4.00% APY, with no minimum balance required.

How To Calculate Core Deposits

Given that core deposits can reflect a bank’s health, it may be valuable at times to figure out how much a financial institution has. This may be a bit technical for a typical layperson, but here is the technique.

•   To calculate core deposits, one can look at the balance sheet or deposit footnotes that consist of checking, savings, and money market deposits. Ideally, it’s best to leave out particular broker or certificate deposits since both deposit accounts tend to follow rates and involve higher costs for the financial institution. Banks that are oversaturated with deposits like this may have liquidity issues and struggle to fund their loan portfolio.

•   The next step: Compare the number of core deposits to overall deposits to find the ratio of core deposits.

◦   Banks with 85% to 90% core deposit ratios are considered to be solid financial institutions.

◦   Additionally, banks should generally have a substantial percentage of non-interest-bearing deposits, consisting of about 30% of total deposits. That ratio of 30% or higher also indicates that a financial institution is in good health.

Recommended: When Will Direct Deposit Hit My Account?

Methods for Increasing Core Deposits

The success of a financial institution relies on the growth of its core deposits. For this reason, financial institutions continually look for ways to attract and retain their customer base and increase those deposits. It’s critical to success.

Here are some strategies financial institutions implement to grow their core deposits.

Cultivating Relationships

Banks can boost core deposits by cultivating relationships with their current customers. After a consumer puts their money in the institution (whether by setting up the direct deposit process, electronically, or with a teller or ATM), they are now a client. The bank or credit union can focus on nurturing that relationship, so the consumer uses the bank for all of their banking needs. Perhaps they will move a savings or business account that they keep elsewhere to this bank.

What’s more, if the customer feels valued, they will likely share their experience with friends and family (you may have done this in your own banking life, for instance). This good word of mouth can lead to the growth of core deposits and strengthen the financial organization.

There are a variety of ways to cultivate better customer relationships. With account holders who bank at brick-and-mortar institutions, one technique is to enhance interactions with the staff. For example, a teller or bank representative might suggest personalized products to meet a client’s needs, such as one of the different kinds of deposit accounts. Online banks can also glean their customers’ needs and create tailored offers with incentives, like a cash bonus or additional services (say, budgeting help).

Another initiative might be to reach out to high net worth clients to personalize the relationship, knowing that these individuals are likely to have cash to deposit. Banks that pay attention to their customer’s needs and make an effort to add special touches can improve customer satisfaction, increasing core deposits.

Recommended: How to Deposit Cash at an ATM

Bolstered Online Services

In today’s world of digital financial management, enhancing online services can encourage more customers to deposit funds at a financial institution and potentially do so in larger amounts. Having the latest bells and whistles, such as seamless spending and saving tracking and the most advanced biometric security measures, can be a big plus.

This can be an especially good tactic for smaller financial institutions. Community banks may struggle with growing core deposits. If an institution like this has limited capital, enhancing online services can be an important avenue to pump up those core deposits. Improved online banking services may well cost a fraction of what it does to bolster a physical bank branch. Creating digital services can also help the bank reach more consumers. While a bank branch may generate between 75 and 100 new accounts per month, a digital branch could help increase this number by hundreds.

When opening a new account, many consumers choose to compare options online first. Even if a bank has competitive rates and has conveniently located branches, prospective account holders may choose competing banks if they rank higher on search engines. For this reason, creating an online presence and digital services that are as strong as possible can grow the number of deposits.

Offer Tailored Services

Financial institutions that offer tailored services to particular industries or specialized banking products can attract consumers who value these services. For example, banks can identify niches or target audiences in their community that provide the most deposit advantages. If they are doing business in an area known for an abundance of hospitals, a niche bank might develop more banking products and services that meet the needs of healthcare professionals (say, ways to pay off student loans faster). They can mold an incentive strategy around the industry to attract more customers and core deposits.

Recommended: Understanding Funds Availability Rules

Banking and the FDIC

A financial institution must strike a balance between core deposits being available for consumers to withdraw funds and their cash being used to make loans and otherwise generate revenue. (After all, one of the ways a bank makes money is based on charging a higher interest rate on loans than is paid on deposits.)

There are governmental guidelines for this: All financial institutions must have bank reserves, a percentage of deposits they must hold and have available as cash. In the past, this figure has ranged between 3% and 10%. But as of 2020 and the COVID-19 crisis, this requirement was lowered to 0% to stimulate the economy. So, since banks are not required to set aside any deposits, if all of the depositors requested total withdrawals from their accounts, the bank wouldn’t have enough money to fulfill this request.

That’s where the Federal Deposit Insurance Corporation (FDIC) comes in and can insure core deposits. Here’s how much does the FDIC insure: up to $250,000 per depositor, per account ownership category, per insured institution. So even in the very unlikely event that a bank were to fail, consumers will have this amount covered.

The Takeaway

Core deposits — the funds put in checking, savings, and money market accounts — help banks make money and offer loans to consumers. Growing core deposits is vital to an institution’s success, and this goal can be achieved in a variety of ways, including offering more personalized services and more online banking capabilities.

If you are interested in accessing state-of-the-art benefits of digital banking, see what SoFi offers.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

What is the difference between core deposits and purchased deposits?

Core deposits are typically stable bank deposits, such as those in checking accounts and time deposits. Purchased deposits are rate-sensitive funding sources that banks use. These purchased deposits are more volatile and, as rates change, more likely to be withdrawn or swapped out.

What is a non-core deposit?

Non-core deposits are certificates of deposit or money market accounts that have a specified rate of interest over their term.

How much does FDIC cover?

The FDIC covers up to $250,000 per depositor, per account ownership category, per insured institution in the very unlikely event of a bank failure.

Photo credit: iStock/MicroStockHub

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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