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If you have a high-interest student loan, it can be difficult to make progress on paying off your balance. Student loan refinancing can be an effective way to lower your interest rates or lower your monthly payments, which can help you manage your debt and save money.
Student loan refinancing allows you to adjust the interest and repayment term of your student loans by taking out a new loan that will pay off part or all of your existing student debt.
The 10 year fixed refinancing rates are currently at record lows which could make this a great time for you refinance your private student loans if you qualify. Because of COVID-19, federal student loan payments and interest are suspended through September 30, 2021. That means refinancing your federal loans isn’t the best idea for now.
Since April, student loan refinancing rates have fallen
The Federal Reserve has responded to the coronavirus pandemic by cutting interest rates to record lows. As of October 2020, the Federal Reserve’s target rate will range from 0% to 0.25%. Since student loan refinancing rates usually follow the trend of the federal funds target rate, it means you may qualify for a lower rate than a year ago.
If the economy improves, the Federal Reserve will likely increase its Federal Fund interest rate range. This makes it more expensive for lenders to borrow money, so that interest will probably also rise. This is why now is such a good time to take advantage of the low rates before they rise again.
You can see how dramatically rates have fallen in the chart below:
How much can I save by refinancing?
The Average Federal Student Loan Payment is $ 393 per month, although this can be lower or higher depending on your education. From 2006 to 2021, the average interest rate for undergraduate students was 4.66% and the average interest rate for graduate students was 6.22%.
Say you had $ 35,359 in student loans at 6.22% interest. With a repayment term of 10 years, your minimum monthly payment would be $ 396 per month and you would pay $ 12,218 in interest charges over the life of your loan.
If you were to refinance your debt and qualify for a 10-year loan at 4% interest, your monthly payment would drop to $ 358 – saving you $ 38 a month. Over the course of your loan repayment, you pay only $ 7,600 in interest costs, saving you more than $ 4,600.
|Original loan at 6.22% interest||Refinanced loan at 4% interest|
|Total interest paid||
If you decide to refinance your student loansConsider as many lenders as possible to find the right loan for you. This is easy with Credible – you can view your rates from our partner providers in the table below in two minutes.
How to Refinance a Student Loan
If you decide to refinance student loans, follow these three steps:
Know your credit score
There are several factors that affect the interest rate you get, including your credit score. You usually need good to excellent credit to get the best rates. If you have poor or reasonable credit, having a creditworthy co-signer can make you eligible for a lower interest rate.
Even if you don’t need a co-signer to qualify for refinancing, applying for a co-signer can help you get a lower interest rate than you would on your own.
2. Compare student loans to refinance lenders
Each refinancing provider has its own rates, term and approval requirements. You may qualify for a loan with lower interest rates or better repayment terms from one lender than another, so it’s a good idea to consider as many lenders as possible to find the right loan for you.
When comparing lenders, pay attention to their interest rates, repayment terms, fees, and whether they accept co-signers for applications. Credible makes this easy – you can compare several student loan refinancing lenders in two minutes of completing a single form.
3. Stay tuned with your monthly payments
After you refinance your loans and pay off your old debt, it’s important to keep track of your monthly payments. Making all of your payments on time can help you build a strong credit history and avoid default.
Setting up automatic payments can be a great way to avoid missing due dates. Some lenders also offer interest discounts when you sign up for autopay, which means you can save money while keeping your loan current.
Is It Worth It To Refinance A Student Loan?
Refinancing your student loans can be a good idea if you can cut your interest rate or cut your monthly payment. Before you decide, it’s a good idea to consider the pros and cons:
Advantages of Refinancing
- Can get a lower interest rate: If you qualify for a lower interest rate, you can save thousands of dollars on interest expense over the life of your loan.
- You may be able to pay off your debt early: If you can lower your interest or shorten your repayment term, you might pay off student loans faster
- Can make reimbursement more manageable: If you refinance multiple student loans, you will get one loan and one payment. This can make your reimbursement much easier to track in the long run.
Disadvantages of Refinancing
- Potentially higher interest charges: If you decide to extend your repayment term, you may receive a lower monthly payment. However, this also means that you can pay more interest over time.
- Loss of Federal Benefits: If you refinance federal student loans, you will lose access to federal benefits and protections. These include access to income-driven repayment plans and student loan forgiveness programs.
If you decide to refinance your loans, remember to consider as many lenders as possible. This way you will find a loan that suits you.
Cat Tretina contributes to Credible which covers everything from student loans to personal loans to mortgages. Her work has appeared in such publications as the Huffington Post, Money Magazine, Business Insider and more.