Low interest rates are bad news for savers looking to see their money work harder for them. But they’re great news for consumers that are looking to refinance debt and save money long-term.
In previous posts, we discussed how now is still a great time to refinance a home mortgage – but these historic low rates mean that it’s also an ideal time to refinance other debt as well, like student loans. While the CARES Act that was signed into law at the end of March states that consumers with federally-held student loans aren’t required to make a payment toward them until at least September, if you have good credit, it could make sense to take other action on them.
Here’s a look at what you need to know about refinancing student loans.
Private or Federally Held Loan Refinancing
Under the right circumstances, refinancing both privately held and federally held student loans makes sense. For example, any privately held loans that you’ve taken out may have variable – rather than fixed – interest rates. This means that the rate ebbs and flows over the loan’s term, which can also cause your payments to fluctuate. In these circumstances, it may make sense to refinance to a low, fixed interest rate – especially if your credit is in good standing.
The majority of student loans today are federally held (about 90 percent to be more specific), but that doesn’t mean you should refrain from exploring refinancing options with these as well. The only potential issue that could arise from doing so with federally held loans is that you could lose out on some of the benefits that are associated with them.
For example, federally held loans tend to be a bit more flexible when it comes to payment deferment and forbearance. Federally held loans are also known for their income-based repayment options, meaning your monthly loan repayment is tied to your current salary. You could lose this if you refinance under a private lender.
When Does it Make Sense?
If your credit is good and you still have a large sum to pay off, it makes sense to explore this option. These low interest rates aren’t going to last forever, and locking in a lower fixed APR is likely going to save you a lot of money long term. Today’s average student loan interest rate is right around 6 percent, and with the opportunity to refinance to a rate in the low 2 percent range, it’s an attractive proposition.
However, there are several considerations you’ll need to weigh. We already mentioned how refinancing a federally-held loan can void some of the benefits and protections associated with such loans. And then there’s the aspect of your credit score. Ideally, your score is better than it was when you initially applied for student loans, but if it’s about the same or even worse, you likely won’t qualify for a lower interest rate by refinancing with another lender.
