Student Loan Refinance vs Federal Repayment After RAP: A $40,000 Worked Example
Michael Whitman
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Trading since 2017, full-time since 2020
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YouTube creator, 137K subscribers
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Published 2026-11-07
Refinancing replaces federal student loans with a private loan, usually for a lower fixed rate; federal repayment keeps them with the Education Department, its income-driven plans and forgiveness. Since July 1, 2026 that means RAP or a fixed plan, and a refinance cannot be undone.
Refinancing swaps your federal student loans for a private loan, usually to get a lower fixed rate; federal repayment keeps them with the Education Department and its income-driven plans, deferments and forgiveness. Both repay the same debt. The difference is that the private loan is priced on your credit today, while the federal loan carries insurance against a bad decade, and a refinance gives that insurance up for good.
Many refinancing guides predate the rules that took effect on July 1, 2026, and many are published by lenders. This page uses the rules in force since July 1, 2026 and runs one $40,000 balance through each option, month by month, so the trade can be priced.
What each one is
Federal repayment now means, for most borrowers, one of three things. The Repayment Assistance Plan (RAP), open since July 1, 2026, sets the payment at 1% to 10% of adjusted gross income, $50 less per dependent and never below $10, and forgives what is left after 360 payments. The 10-year standard plan remains for older loans, and the Tiered Standard plan stretches fixed payments over 10 to 25 years by balance; $25,000 to $49,999 gets 15 years. Borrowers with only pre-July 2026 loans can still use income-based repayment (IBR). Our interest rate page explains how a fixed rate is set.
A private refinance is a new loan from a bank or online lender that pays off the federal loans. The rate is fixed or variable and depends on your credit score, income and debt. It follows the lender’s contract, not federal law, and a Direct Consolidation Loan only takes federal loans, so the debt cannot come back.
Where they differ
| federal repayment (Nov 2026) | private refinance | |
|---|---|---|
| rate | fixed by law each year: 6.52% for 2026-27 undergraduate loans | set by the lender from your credit; fixed or variable |
| payment if income falls | RAP resets to 1-10% of AGI, $10 minimum | unchanged unless the lender agrees |
| forgiveness | PSLF after 120 qualifying payments; RAP after 360 | none |
| unpaid interest | not charged on RAP after an on-time payment | always charged |
| deferment | economic hardship and unemployment deferment, but not for loans made from July 1, 2027 | lender’s own hardship terms |
| reversible | you can switch federal plans | no |
Three rule changes matter most for the choice.
- SAVE is over. On March 10, 2026 a federal judge in Missouri, acting on an Eighth Circuit judgment of March 9, vacated the SAVE rule. MOHELA, one of the federal servicers, says it sent notices from July to September 2026 giving borrowers 90 days to pick a plan, after which they are placed in the standard or Tiered Standard plan.
- New borrowing narrows the menu. A new federal loan taken out on or after July 1, 2026 locks all of a borrower’s loans into RAP or Tiered Standard, and Pay As You Earn and income-contingent repayment close on July 1, 2028.
- Hardship breaks shrink. For loans made from July 1, 2027, the law drops economic hardship and unemployment deferment and caps discretionary forbearance at 9 months in any 24, per the Congressional Research Service.
Taxes differ too. The IRS Taxpayer Advocate says forgiveness under an income-driven plan in 2026 or later is generally taxable income, while PSLF forgiveness is not.
The original data
Your federal rate depends on the year each loan was taken out. By law, each award year’s rate is the high yield at the last 10-year Treasury note auction before June 1, plus 2.05 points for undergraduate loans, 3.60 for graduate unsubsidized loans and 4.60 for PLUS loans. We rebuilt every year from TreasuryDirect’s auction results; the 2026-27 figures match FSA’s June 4, 2026 announcement.
- First year of the formula: 3.86% for 2013-14.
- Lowest: 2.75% for loans first disbursed in 2020-21, after a 0.700% auction in May 2020.
- Highest: 6.53% for 2024-25. The 2025-26 rate was 6.39% and the 2026-27 rate is 6.52%.
- For 2026-27: 8.07% for graduate unsubsidized loans and 9.07% for PLUS loans, all fixed for life.
A borrower whose loans come from 2020-21 is paying 2.75%, which almost no refinance offer beats, while one with 2024-25 graduate loans at 8.08% has much more room. The rate that matters is the weighted rate on your own loans, which your servicer shows.
Who holds the debt. The Federal Reserve’s G.19 release counts $1.88 trillion of student loans at September 30, 2026, up 2.8% in a year. Of that, $1.63 trillion, 86.6%, was held by the federal government.
- End of 2006: 20.8% of student loans were federally held. Most of the rest was held by banks and other lenders, largely loans made under the old federally backed bank program (FFEL), which Congress closed to new loans in 2010.
- End of 2015: 71.9%. End of 2025: 86.0%. September 2026: 86.6%.
- The other 13.4% sits with banks, finance companies, schools and securitized pools, a group that includes private and refinanced loans as well as older FFEL loans.
Repayment is still the weak spot. The New York Fed’s Q2 2026 report, released August 11, 2026, put student debt at $1.65 trillion on its own credit-bureau measure. Its flow into serious delinquency was 7.83% of balances, down from 12.88% a year earlier but still the highest of the six debt types it tracks, and the Fed said re-reporting of defaulted student loans was still distorting the figures.
Download the data: $40,000 worked example, federal rates by year and student loans by holder. Reuse is fine with credit and a link back, under the site license.
| Dataset | Covers | Pages citing it | Download |
|---|---|---|---|
| A $40,000 student loan under federal plans, RAP and example private refinance rates | 10-year standard, 15-year Tiered Standard and RAP at three incomes on $40,000 at 6.52%, and 10-year private refinances at example rates of 4.50%, 5.50% and 7.50% | 1 | $40,000 worked example (CSV) |
| Federal Direct Loan interest rates by award year, 2013-14 to 2026-27 | 14 award years of fixed rates for undergraduate, graduate unsubsidized and PLUS Direct Loans | 1 | Federal Direct Loan rates by year (CSV) |
| US student loans outstanding and the federal government's share, quarterly, 2006-2026 | 83 quarters, Q1 2006 to Q3 2026 | 0 | Student loans and federal share (CSV) |
A worked example: $40,000 at 6.52%
Take a hypothetical single borrower with no dependents, $40,000 of federal loans at 6.52%, flat income and every payment on time. The private rates are labeled examples, not offers; real quotes depend on credit. Totals use the exact payment before it is rounded to the cent.
| plan | monthly payment | total paid | time |
|---|---|---|---|
| federal 10-year standard, 6.52% | $454.60 | $54,551.89 | 10 years |
| federal Tiered Standard, 6.52% | $348.88 | $62,798.92 | 15 years |
| RAP at $45,000 AGI | $150.00 | $54,000.00 | 30 years, then $22,000 forgiven |
| RAP at $65,000 AGI | $325.00 | $66,263.23 | 204 months |
| example private refinance, 4.50% | $414.55 | $49,746.44 | 10 years |
| example private refinance, 5.50% | $434.11 | $52,092.61 | 10 years |
| example private refinance, 7.50% | $474.81 | $56,976.85 | 10 years |
- The refinance math. At 5.50% the saving against the federal 10-year plan is $54,551.89 − $52,092.61 = $2,459.28. At 4.50% it is $4,805.45. At 7.50% the refinance costs $2,424.96 more.
- RAP at $45,000. 4% of $45,000 is $1,800 a year, $150 a month. The first month’s interest is $217.33, so the $67.33 not covered is not charged, and the government reduces principal by $50. The balance falls exactly $50 a month for all 30 years, leaving $22,000 to be forgiven, which is taxable under current law.
- RAP at $65,000. 6% of $65,000 is $325 a month, which covers the interest, so there is no subsidy and the loan is paid off in 204 months. That is $129.60 a month less than the 10-year plan but $11,711.34 more in total.
- The PSLF case. A borrower at $45,000 working full time for a qualifying public employer pays $150 × 120 = $18,000, and PSLF forgives the remaining $34,000 tax-free. Refinancing at 5.50% to save $2,459.28 would cost $52,092.61 over the same 10 years, $34,092.61 more.
Our paying off debt page covers how extra payments shorten a schedule like these.
Which one to use
Refinance when all of these hold: your income is high and steady enough to pay the loan off in about 10 years, you will not work in public service, you would not need RAP if your income fell, and a fixed private rate is clearly below the weighted rate on your federal loans. Graduate and PLUS loans at 8% to 9% are where a lower private rate has the most room.
Keep federal repayment when your income could fall or swing, you work or might work for a government or nonprofit employer, your balance is large next to your income, or your loans carry rates from cheap years like 2020-21. RAP’s payment is tied to income, and that protection has no private equivalent.
A middle path is to refinance only the costliest federal loans, or only private loans you already hold, and keep the rest federal.
When it fails
A refinance fails when life changes. A job loss with federal loans means a RAP payment as low as $10 and unpaid interest not charged; with a private loan the full payment is still due unless the lender agrees.
A variable rate can climb. A variable private rate starts below a fixed one and rises with market rates, so a saving in year one can become a cost later.
The federal side fails too. RAP’s income brackets are not indexed to inflation, the Department’s own analysis says, so the same real income takes a bigger percentage over time. A borrower who stays in RAP for 30 years and has a balance forgiven may owe income tax on it. Borrowers who take any new federal loan after July 1, 2026 lose access to IBR for all their loans.
Questions people ask
Can I refinance federal student loans back into federal loans?
No. Once a private loan pays them off, the federal loans are gone, and a Direct Consolidation Loan can only include federal loans.
Did the SAVE plan end?
Yes. A federal court order of March 10, 2026 vacated the SAVE rule, and servicers told SAVE borrowers to choose another plan within 90 days of their notice or be placed in a standard plan.
What is the federal student loan rate for 2026-27?
6.52% for undergraduate Direct Loans, 8.07% for graduate unsubsidized loans and 9.07% for PLUS loans first disbursed from July 1, 2026 to June 30, 2027, fixed for the life of the loan.
Is RAP better than refinancing?
Not for everyone. The worked example shows both directions: at $45,000 RAP costs $150 a month and a 5.50% refinance $434.11, while at $65,000 RAP costs more in total than a 10-year schedule.
Does refinancing hurt my credit?
Comparing offers through prequalification uses a soft check; the full application uses a hard inquiry. Our debt consolidation loan vs balance transfer page covers the same shopping steps for other debt.
Related
How lenders price a fixed rate is on interest rate, and the order to pay several debts in is on paying off debt. If the refinance would also roll in card balances, debt consolidation loan vs balance transfer compares those two routes.
This page is educational, not financial advice. Test every idea on your own charts before risking money.