Should you refinance student loans now?
Here’s what you need to know—and what it means for you.
If you have student loans, you’re not alone. According to the latest student loan debt statistics, there are 45 million borrowers who collectively owe $1.6 trillion in student loan debt. What’s the best way to pay off student loans? There are several strategies for student loan repayment, ranging from income-driven repayment to student loan refinancing. Let’s explore whether student loan refinancing is right for you.
Student Loan Refinancing
Student loan refinancing is the process of consolidating your current federal student loans, private student loans or both into a new, single student loan with a lower interest rate. When you refinance student loans, you can get a lower interest rate, lower monthly payment and pay off student loan debt faster. You can also choose your student loan repayment term, which typically ranges from 5 to 20 years, and whether you prefer a fixed interest rate or a variable interest rate. A fixed-interest rate means the interest rate on your student loans will not change during your loan term. For example, if you refinance student loans and get a 3% interest rate, you will always have a 3% interest rate. A variable interest rate means that your interest may increase or decrease during your loan term. If you think that interest rate will rise over time, it may be advantageous to choose a fixed interest rate. If you think interest rates will decline over time, you may prefer a variable interest rate. Variable interest rates are lower than fixed interest rates and start at 1.99% today.
Now, let’s explore why you should and should not refinance student loans. Your financial situation is unique, so it’s up to you to decide what works best for you.
Why you should not refinance student loans now
Let’s start with some reasons not to refinance student loans now.
1. Payment Pause
First, President Donald Trump paused federal student loan payments through December 31, 2020. This means you are not required to make any federal student loan payments during this period. Importantly, this only applies to federal student loans, not private student loans. Also, a payment pause is not the same as student loan forgiveness.
2. No new interest accrual
Second, no new interest will accrue on your federal student loans during this period. Interest expense can increase your student loan balance significantly, so this temporary reprieve can help lessen the financial burden.
3. Private student loans
Third, once you refinance federal student loans, they become private student loans. Why? When you refinance student loans, you refinance with a private student lender. Therefore, if you plan to pursue public service loan forgiveness or income-driven repayment plans for your federal student loans, then you may not want to refinance federal student loans. To qualify for these opportunities, you need federal student loans outstanding. Similarly, if you are struggling financially or need forbearance or deferment options, you may prefer to keep federal student loans outstanding. That said, most private lenders now offer deferral options after you refinance that allow you to defer student loan payments if you lose unemployment or face other financial difficulties. You can also refinance your private student loans only if you choose not to refinance federal student loans.
Why you should refinance student loans now
There are many reasons why you should refinance student loans now:
1. Get a lower interest rate
The main goal of student loan refinancing is to get a lower interest rate and save money. With a lower interest rate, you can get a lower monthly payment and pay off student loans faster. Remember this: after the temporary student loan relief ends, you will have the same interest rate as before. That means interest will start accruing again and your student loan balance could increase. Student loan refinancing could help you lock in a lower rate today. Most lenders allow you to check your interest rate for free online within about two minutes with no impact to credit score.
2. Choose your own monthly payment
Student loan refinancing offers more flexibility than a traditional federal student loan with a 10-year repayment period. For example, with student loan refinancing, you can choose several different student loan repayment options. For example, if you want to pay off student loans faster, you should choose a shorter repayment period such as 5 years. You would have a higher monthly payment, but could save significantly in interest payments. Alternatively, you could choose a longer student loan repayment term such as 20 years. This would result in lower monthly payments, but would increase the total interest paid. Overall, choose a student loan term that is best for your financial life.
3. Student loan relief is temporary
The current student loan relief is temporary and only applies to your federal student loans. You still have to pay your private student loans in the normal course. If you’re struggling financially, it’s definitely beneficial to pause federal student loan payments now. The downside to not tacking your student loan payments today is that your balance will not disappear. Student loan relief is temporary and your student loan balance and existing rate will still be there if you don’t act. Just because federal loan payments are paused doesn’t mean you shouldn’t pay them. On the contrary, now is an ideal time—if you have the financial resources—to pay off student loans faster through student loan refinancing and student loan repayment.
How to get approved for student loan refinancing
To get approved for student loan refinancing, typically you have a credit score of at least 650, are currently employed, have a stable monthly income and a low debt to income ratio. Lenders want to ensure that you can pay your student loans payments and the debt as well as living expenses. If you’re unemployed, have a low credit score or are struggling financially, you may not be the best candidate to refinance student loans. You can also apply with a qualified co-signer such as a parent or spouse who has a strong credit and income profile. While the cosigner assumes equal financial responsibility for your student loans, a qualified cosigner can help you get approved for student loan refinancing and get a lower interest rate.
How much money can you save through student loan refinancing? Let’s assume that you have $80,000 of student loans at an 8% interest rate and 10-year repayment term. If you can refinance with a 3% interest rate and 10-year repayment term, you could save $198 each month and $23,776 total.
This student loan refinancing calculator shows you how much you can save when you refinance student loans.