What is Student Loan Refinancing and When is a Good Time to?
Student loan refinancing means taking out a new loan at a new interest rate and terms to pay your existing loans. You can usually refinance both federal or private student loans. When you refinance, you are applying for a private loan. If you have private loans, this usually isn’t a big deal, but if you have federal loans you will lose your federal protections.
Whether or not you should refinance your student loans depends entirely on your financial situation and on the type of loans you have. When people refinance their loans with a lower interest rate, they could potentially save thousands of dollars in the long term, especially if they are able to maintain the same length of the loan. Other times people will refinance to make their monthly payments more manageable with their budget.
Private vs. Federal Student Loans
If you have private student loans at a high interest rate, it may make sense to look into refinancing. You should make sure you are in good financial standing (e.g., credit score, income, debt to income, etc.) and that you are on time with all of your monthly payments. You also want to make sure that when you refinance, you are financially comfortable with your new monthly payments and terms.
If you have federal student loans, the government is currently offering student loan relief to most federal loans including 0% interest and no payments until September 30, 2020. Additionally, you may lose benefits such as eligibility for public service loan forgiveness, income based repayment plans, deferment and forbearance, or loan forgiveness through a repayment program. You should be very cautious of refinancing, as once you lose these benefits and protections, you can’t go back.
When Should I Refinance?
It may make sense to refinance, if:
- You have private student loans. Since private loans are not eligible for income based repayment or loan forgiveness, you have nothing to lose by refinancing and should do so as soon as you find a better rate and terms.
- If you have federal student loans, wait until you are in a financially stable position. Since you will lose some of the federal student loan benefits when you refinance, wait until you are in a comfortable position where you can keep making payments consistently. You may also want to consider taking advantage of the federal relief due to the CARES Act.
- You would save money. When you refinance and lower your interest rate, you can potentially save money. Check the lender’s website constantly as rates are always changing. As long as you qualify for a better rate than the one you currently have, you would be increasing your savings.
- You find competitive rates. Economic factors will dictate the rates lenders offer. When rates are pushed down, it’s the best time to refinance since it makes borrowing money less expensive for consumers. The Fed recently cut rates to near-zero, making it one of the best times for consumers to refinance. However, you should only do this if you have private loans that don’t qualify for any form of relief. On the other hand, if you have federal student loans, there is no need to refinance as they are automatically placed on deferment and have 0% interest rates until September 30, 2020. If you are in a comfortable position, you can still contribute payments towards the principal.
Where Do I Start?
You should compare the interest rates and terms offered by lenders, and choose the best option available. Generally, in order to qualify for the lowest rates available, you should be in good financial standing. Lenders assess borrowers before making a decision based on a number of factors such as credit score, income, debt to income ratio, among others. You can also refinance more than once, so keep checking for better rates.
At Snowball, we make the refinancing process more transparent and ensure you have evaluated the best lenders to get the best rate and terms for you. We also give you the best course of action to tackle your student debt and compare refinancing, optimizing payments, and federal decisions. You can learn more and sign up here.