Refinancing your student loans can often come with huge benefits. It could mean a lower interest rate, a smaller monthly payment, and fewer costs in the long run. But be warned: Timing is everything — especially if you have federal student loans.
But if you have private student loans then a refinance could be a smart move. Check a student loan refinancing calculator to gauge the potential savings it could offer, and make sure to compare rates and multiple lenders, as interest rates can vary widely.
If you have federal loans, then read on. There are lots of factors to consider before pulling the trigger. Here’s what you need to know.
Can you get student loan forgiveness if you refinance?
Refinancing a federal student loan could help you get a lower interest rate, but that comes with some trade-offs. For one, it would mean losing all the benefits that federal student loans come with — things like income-based repayment plans, student loan forgiveness if you enter a public service career, and the various loan repayment and student loan forbearance options.
Again, if you have private student loans then you don't qualify for federal benefits, so refinancing could be a smart move if you're looking to lower monthly payments and change your loan term. Just plug your loan amount and estimated credit score into Credible's free online tools to view multiple mortgage lenders and the rates they offer.
The Biden administration has just extended the forbearance options set out by the CARES Act early last year. Now, federal student loan borrowers can pause their monthly payments until at least September 30, 2021. Previously, the relief measure was set to expire on January 31.
"If you have federal student loans of any size, it would likely make the most sense to wait until after September 30, since payments and interest are allowed to be deferred before refinancing federal loans," said Brad Griffith, a financial planner with Buckingham Advisors in Ohio. "It’s possible that this could get extended further. Instead of just spending those payments, we suggest our clients use this as an opportunity to get their financial house in order: building up an emergency fund, paying off credit cards and other high-interest rate debt, and saving up cash for when payments begin again."
Biden’s plans on student loan forgiveness
Another consideration is the potential loan forgiveness that could be coming down the pike.
"The new administration has discussed $10,000, $50,000, and even complete loan forgiveness, which would more than likely apply to federal student loans only," Griffith said. "Keeping this in mind would certainly be a factor to consider when deciding if you should refinance from a federal to a private student loan."
Of course, nothing is set in stone, and it may still be beneficial to refinance federal loans, even if forgiveness is on the agenda.
"It seems possible this legislation could get some push back in Congress, so it’s important to consider other factors in case it’s not immediate or perhaps doesn’t happen at all," Griffith said.
If you have private loans and don't qualify for student loan forgiveness, then you should consider refinancing your student loans. With today's low rates, you could save time and money with a student loan refinance. Head to Credible now to refinance your student loans today.
When to refinance student loans
Refinancing private loans is usually an easy decision. If you can lower your interest rate and the fees to refinance are minimal, then it’s typically a smart move.
With federal student loans, though, it’s not as "cut and dry," Griffith said. While refinancing to a private loan could help you lower your interest rate, you’ll want to be sure losing all those federal loan benefits is worth it.
If the rate drop is big enough, that certainly may be the case. If you refinanced from a $100,000 federal loan at an 8% rate to a private student loan at a 3% rate, for example, you’d save a whopping $5,000 per year in interest and much, much more over the course of the loan’s life.
You’d also pay off the loan sooner, which would free up more cash and allow you to start saving for retirement or any other financial goals you might have.
How to refinance private student loans
If you do decide to refinance, always compare lenders first, since rates can vary from one to the next.
"Make sure to look at if the rate is fixed or variable," Griffith said. "With rates as low as they are, it will likely make sense to lock in a fixed rate. Variable rates can increase over time and many have no caps, which could substantially increase total interest costs over the life of the loan if rates increase."
Use Credible to start comparing student loan refinancing rates now.