Student loans can make paying for an undergraduate or graduate degree easier but it may lead to a financial reckoning when it's time to pay those loans back. Americans collectively owed $1.7 trillion in student loan debt through the fourth quarter of 2020, according to Federal Reserve data.
The financial impacts of the coronavirus pandemic raise an important question for those struggling to keep up with loan payments: Is now a good time to refinance student loans?
Refinancing student loans now could mean lower monthly payments if you're able to secure lower rates on your debt. But there are some things to consider first to help decide if it's right for you.
If you’re considering refinancing, make sure to compare student loan refinancing rates before you apply, so you can make sure you find the best deal for you.
1. When to refinance student loans
Whether you should refinance student loans or not may depend on the type of loans you have. With interest rates near zero, now could be a good time to consider refinancing private student loans.
The reason? Unlike federal student loans, private student loans are not eligible for government-sponsored relief programs. That includes CARES Act relief measures which began in March 2020 for eligible federal student loan borrowers.
If you have a good credit score and credit history, you could refinance private student loans at a lower rate. This could mean saving money and lower rates can also translate to lower payments, making private student loans easier to manage. With more of your payment going toward the principal, you may also be able to pay off debt sooner.
Those are all strong reasons in favor of refinancing private student loans but consider what you stand to gain personally. Consider using an online student loan refinancing calculator to estimate what your new monthly payments may be. You can also use an online tool like Credible to view a rates table that compares rates from multiple lenders at once.
2. When not to refinance student loans
Student loan refinancing may not be the best option if you have federal student loans. That's because those loans are still eligible for CARES Act relief thanks to a January executive order.
President Biden's executive order keeps COVID-19 protections for federal student loan borrowers in place through September 30, 2021. Again, the chief benefits include:
- Temporary student loan forbearance
- Moratorium on collections for loans in default
- 0% interest rates
Refinancing federal student loans into a new private loan would result in losing those protections. You may be able to secure lower rates and lower monthly payments for education loans but if your income has suffered because of COVID-19, keeping up with them could still prove difficult.
You might consider consolidating federal school loans instead. Federal student loan consolidation won't lower your interest rates but it can streamline loan repayment by combining multiple loans into one. That could make your loans easier to deal with once the temporary forbearance period ends.
Remember also that refinancing federal student loans wouldn't make sense if you're seeking public service loan forgiveness (PSLF). That's only available to borrowers on federal income-based repayment plans.
3. How to start refinancing your student loans
If you want to refinance student loans, first start by estimating how much you might be able to save. Again, this is where an online student loan refinancing calculator can be helpful.
Next, consider whether variable interest rates or fixed interest rates are a better fit. With variable rate loans, your rate can fluctuate over time. When rates are low, you pay less interest on your student loans. But if rates increase, repayment can become more expensive.
Refinancing to a loan with fixed interest rates can offer predictability in your monthly student loan payments and total interest paid. With interest rates as low as they are now, you may prefer the certainty of fixed interest rates versus variable rates.
If you've done the math to estimate potential savings and decided whether a fixed or variable rate loan makes more sense, the next step is to check your rates. Factors that can affect your rates include your credit score, as well as your loan balance. Practicing good credit habits such as paying on time, maintaining low credit utilization and avoiding delinquency or default can help with securing the best rates. If you don't have a lengthy credit history, you may consider applying for student loan refinancing with a trusted co-signer.
It's easy to compare interest rates from different loan servicers and lenders using an online tool like Credible. You can get prequalified for student loan refinancing rates without affecting your credit score. That can help with finding the right borrowing option to refinance student loans.