Should You Rush to Refinance Your Student Loans?

May 3, 2022

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Even with federal student loans in forbearance and talk shifting to prospects for forgiveness, student loan interest rates still matter — and nothing underlines that point better than the likelihood they’ll soon increase.

Private student loan borrowers, whose payments aren’t suspended and won’t benefit from any federal cancellation, may be wondering if now is their last chance to refinance at interest rates near their historic lows.

The answer is yes. 

Experts from Goldman Sachs anticipate up to seven federal funds target rate hikes this year, but rates can rise in anticipation as well.  In December 2021, refinance rates for a 30-year mortgage hovered just below 3.1%. Now, they’re right around 5.2%, according to NerdWallet data.

Chad Pastorius, manager of strategic planning at the nonprofit lender Rhode Island Student Loan Authority, explains that while student loan interest rates may be tied to different factors than typical mortgage rates, the trajectory of mortgage rates coupled with advance warnings from the federal government and record inflation sends a good signal of what’s to come for student loans. And depending on the financing model, some student loan refinance lenders have already had to increase rates.

But this doesn’t mean all student loan borrowers need to drop everything and refinance right now. Here are the borrowers who should rush to refinance and those who have reason to wait. 

Rush: Private student loan borrowers with stable income

Those with private student loans don’t have the luxury of holding out for potential student loan cancellation. The best way to pay off these loans fast and at the biggest discount is by lowering your interest rate through refinance. 

And the best time to refinance your private student loans is whenever you can get a better rate than the one you already have. You’ll need a stable income, a debt-to-income ratio of 50% or better and a credit score in at least the high 600’s to qualify. The better your credit profile, the lower rate you can expect.

Typically, refinancing for the shortest term available will also come with a lower rate. However, that could mean a higher monthly payment. On the other hand, a lower interest rate with a longer loan term could afford you a much lower payment, but may mean higher total repayment costs.

Consider this: A borrower with $29,000 in student loan debt at 7% interest with a 10-year term will see payments of $337 a month and will pay $11,405 in interest over the life of the loan. 

This is how their payments and total savings could look by lowering the interest rate and changing the loan term.

APR

Term (years)

Payment

Total savings

7%.

10.

$337.

$0.

6%.

10.

$322.

$1,770.

5%.

15.

$229.

-$874.

4%.

5.

$534.

$8,360.

Before deciding, check your rate offers with several lenders. You may also be able to improve your rate offer by adding a highly qualified co-signer. Make sure to prequalify with lenders that will show your rate and term offer with a soft credit check, so your score isn’t affected. 

Probably wait: Private student loan borrowers struggling to make payments

If you can’t keep up with your current student loan payments, refinance may not be an option for you. 

Lenders consider your credit profile, which can include your student loan payment history. They also evaluate the factors that are likely making it difficult to keep up with your current payments, like income and total debt load. 

It’s best to take time to improve your credit profile before applying to refinance. You might also qualify with a co-signer, but ensure that person understands your financial situation and knows they will be responsible for the loan if you can’t pay. 

Wait: Federal student loan borrowers

Refinancing is only available through private companies. That means if you refinance your federal student loans, they’ll become private student loans and you will lose government safety nets. Brian Walsh, a certified financial planner, CFP, and senior manager of financial planning at student loan lender, SoFi, urges federal borrowers to consider what’s at stake when chasing a lower interest rate. 

Federal borrowers who may need payment protection through programs like income-driven repayment and those who qualify for the Public Service Loan Forgiveness program should not rush to refinance. 

But even borrowers who won’t use those programs still have reason to wait. All federal student loans are in an interest-free forbearance through Aug. 31, 2022. And not only has President Joe Biden made clear that another extension is on the table, he has also signaled that he will cancel at least $10,000 in student loans. The administration hasn’t yet released details on the student loan cancellation plan, but all federal student loan borrowers may not qualify.  

At a minimum, federal borrowers should wait until the payment pause expires and details on the student loan cancellation plan are public to evaluate their situation and determine if refinance is right for them. 

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