Should You Refinance Your Student Loans?

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    Should You Refinance Your Student Loans?

    There are several potential pros and cons of student loan refinancing. So when deciding whether to refinance your own student loan, there are several factors to consider.

    The decision often depends heavily on the type of loan you have, whether government or private. If you have federal loans and are currently receiving one or more federal benefits, you may want to avoid refinancing so you don’t lose them.

    But even if you don’t currently have any government student loan benefits, it doesn’t necessarily mean that you should refinance your loans right away. Here’s how to decide when to refinance your student loan and how to get the lowest interest rate in the process.

    How Does Student Loan Refinance Save Money?

    For many borrowers, the most important question is whether they can save money by refinancing their student loan. Refinancing can basically save you money in two ways:

    • Reduce the interest rate you pay on your balance
    • Shortening your repayment period to reduce the total interest paid

    These two money savers often go hand in hand as a borrower may need to agree to a shorter repayment period in order to get a better interest rate. Usually, the shorter the repayment period, the lower the interest rate that a lender is willing to offer.

    Borrowers often mistakenly believe that halving the interest rate will cut their monthly payments in half. But half the interest rate typically only reduces a payment by 10 to 20% because the majority of the payment is used for the principal, not the interest. So a 1 percentage point decrease in the interest rate will likely save a borrower only $ 5 to $ 6 per month for every $ 10,000 of student loan debt.

    In reality, most of the savings from refinancing are achieved by switching to a shorter term rather than a lower interest rate. But it is also important to note that a shorter term can increase your monthly loan installment, even at a lower interest rate.

    How long will interest rates stay low?

    An exact prediction of the interest rates is not possible because the uncertainty is great. But it seems likely that interest rates will rise soon.

    The Federal Reserve Board previously announced that it would not hike rates until 2023, giving full employment priority over controlling inflation. But it recently reversed course, announcing that it expects three rate hikes in 2022, plus two more each in 2023 and 2024.

    So interest rates could rise in the first quarter of 2022, plus or minus a quarter. And by the end of 2023, rates could be as high as 2.125%, according to three Fed officials.

    Related: Why is it important if the Fed raises interest rates?

    Should You Refinance Your Federal Student Loans?

    Federal consolidation loans do not offer rate cuts. The only way to lower the interest rate on federal student loans is to refinance them into a private student loan.

    This can result in a lower interest rate if the borrower (or co-signer, if applicable) has excellent creditworthiness. But refinancing federal loans into a private student loan causes the loans to lose the superior benefits of federal loans, such as:

    There are a few other factors that can affect whether borrowers choose to consolidate or refinance their federal student loans, including:

    • Expiry of the payment stop for federal student loans: The payment pause and the interest waiver were recently extended again. It is now expected to end on May 1, 2022. This can lead to an increase in refinancing activities in April 2022, when federal loans no longer correspond to the zero interest rate.
    • Potential for new student loan waiver guidelines: If federal student loans are largely granted, this will most likely happen soon before the mid-term elections. As a result, borrowers may be reluctant to refinance federal loans into private loans until then, fearing that they will be missing out.
    • The Limited Public Service Loan Forgiveness (PSLF) waiver: The restricted PSLF exemption is available through October 31, 2022 and could offset past repayment periods for millions of borrowers who work (or have worked) for qualified employers.

    In general, federal loan borrowers should only refinance their student loans if (A) they do not qualify for PSLF and (B) their income is high enough that they will not benefit from participating in an IDR plan and it is unlikely that they will they are under attack by future student loan award guidelines.

    Should You Refinance Your Private Student Loan?

    There are no early repayment penalties for private student loans. So nothing prevents a borrower from refinancing their personal student loan if they can qualify for a lower interest rate. Some borrowers have refinanced their personal student loans multiple times, each time to get a lower interest rate.

    Refinancing is a good option for borrowers who have excellent credit scores or who have a student loan from a few years ago when interest rates were higher. Even if the borrower’s creditworthiness has improved since the last application, they may qualify for a lower interest rate.

    A potential disadvantage of refinancing student loans, including personal loans, is that it replaces multiple loans with a single loan. This can streamline the repayment, but it also prevents the borrower from going to the loan with the highest interest rate for faster repayment.

    Accelerated repayment of the highest interest rate loan instead of refinancing can save money by lowering the average interest rate paid by the borrower. However, if you choose to go this route, it is important to tell the lender that the extra money you pay should be counted as an additional payment rather than an early payment of the next installment.

    How can you qualify for a lower refinancing rate?

    The interest rate that you are offered on a personal refinancing loan depends on your creditworthiness. And if you have a co-signer, their creditworthiness will also affect your interest rate.

    Interest rates can vary from about 2% to about 12% depending on your creditworthiness and lender. Here are a few things you can do to increase your chances of getting a refinancing rate that is on the lower end of that scale:

    • Get your college degree. Students who drop out of college are less likely to be eligible for a personal refinance loan because they are statistically more likely to default on their student loan.
    • Pay your bills on time. Making your monthly payments on or before the due date will help improve your credit score which will help you qualify for the student loan refinance.
    • Reduce debt. Do not have any credit on your credit cards. A low debt-to-income ratio increases your chances of being eligible for a personal refinance.
    • Retain a permanent position. Lenders love to see income stability. Borrowers who have been with their current employer for at least 2-3 years are therefore more likely to qualify for refinancing.
    • Add a creditworthy co-signer. Applying to a creditworthy co-signer may result in a lower interest rate, even though borrowers may qualify for their own refinancing. All you need to know is that co-signers take risks as their creditworthiness is affected (positively or negatively) by the loan payment activity.

    Most importantly, check out some of the best refinancing providers to find the lowest interest rate available. You can also use a lender marketplace like Credible to get quotes from multiple lenders in minutes.

    When is the Best Time to Refinance Student Loans?

    While refinancing takes place all year round, it often peaks in November and December. This is because the six month grace period after students graduate will expire at that time.

    However, refinancing this soon after graduating from college may not be optimal as credit scores drop with each school year as credit utilization increases. It takes several years of permanent tenure and on-time billing for creditworthiness to improve.

    However, interest rates on private student loans are currently at or near a record low. So even with less than outstanding credit ratings, borrowers can qualify for a lower interest rate, especially if they apply to a creditworthy co-signer.

    Final thoughts

    When considering whether to refinance your student loan, it is important to consider the total cost of the loan. Compare the total loan payment before and after refinancing the loans. This is particularly important if the refinancing has a different term.

    A longer repayment period can reduce the monthly loan payment but increase the total amount. And while a shorter repayment period can increase your monthly loan amount, it could save you a lot of money overall.

    Finally, remember that private lenders can vary widely in the benefits they offer borrowers, such as: Here you can compare our top refinancing companies to find the right lender for your needs.

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