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These days, all eyes are on federal student loans. Millions of borrowers have benefited from COVID-19 relief through payment forbearance; and proposals for broad-based forgiveness are grabbing headlines as well.
But private student loan borrowers are left out of those efforts. They do, however, have a powerful option to make their debt more manageable: refinancing.
Refinancing is replacing your private student loan or loans with a new loan, typically at a lower interest rate. It’s not a useful tool for borrowers in dire straits, but can be a big help for those with good credit scores and stable incomes.
And it’s become a better option over the last two years as interest rates have declined sharply.
Based on an analysis of 23 lenders’ advertised rates, the average minimum fixed interest rate on refinanced student loans was 3.00% on Sep. 28. That’s a 9% decrease compared to the rate a year ago.
If you have private student loans, refinancing them as soon as you can get a lower interest rate should be a no-brainer. Here’s why.
You can cut high interest rates
Depending on when you borrowed and your finances at the time, your private student loans could have interest rates of 6%, 7%, even 10% or more. Refinancing those high-interest private loans can save you money now and in the long run.
For example, if you owe $27,000 at 11% interest, refinancing to 4.3% would lower your monthly payments by about $100 and your overall interest costs by $11,400, assuming a 10-year repayment plan.
Student loan refinance lenders typically want borrowers with a FICO credit score in at least the high 600s, as well as a monthly debt-to-income ratio below 50% — including your existing loans.
That’s just to qualify, not necessarily to get the lowest possible rate.
But even if you can’t get the lowest advertised rate, refinancing can still save you money.
Let’s say you recently graduated with $78,000 in private student loans at an average interest rate of 11%. With a 10-year repayment term, your monthly payment would be over $1,000 a month.
Here’s what your payment might look like at lower interest rates, and how much you might save in interest overall:
Most refinance lenders charge no upfront fees, so you can refi for more savings as often as your credit history and finances improve.
Estimate your potential savings
You won’t lose federal benefits
Borrowers with federal student loans shouldn’t refinance right now. The federal government has suspended payments and interest on those loans through May 1, 2022. Refinancing, which only private lenders offer, would cost borrowers those benefits.
But that risk doesn’t apply if you have private student loans. Not only are private student loans not included in the payment suspension, they’re also off the table for potential loan forgiveness.
If you aren’t able to refinance now, private student loan relief is available from many lenders, typically via a payment break known as a natural disaster forbearance. But interest still accrues during these breaks — unlike with federal loans. Contact your lender to discuss your situation and find out what your options are.