Is now a good time to refinance your student loan?
May 6, 2020
- Student loan interest rates are at all-time lows
- How-to (and why to) refinance private vs. federal loans
- Start with a student loan refinance calculator to estimate your savings
If you have student loans and you’re looking for a silver-lining during COVID-19, here it is: interest rates are near all-time lows and that presents a great opportunity to lower monthly payments, pay less interest, release a cosigner, or consolidate multiple loans into one low payment.
But before you submit an application, determine the right plan of attack for your federal vs. private student loans, and whether it makes sense to refinance some, all, or none of your debt.
Pros of refinancing your student loan right now
According to David Klein, cofounder of online lender CommonBond, “people have an opportunity to refinance their student debt at rates that folks haven't seen before." Student loan refinance rates were at a 12-month low in September 2019, months before COVID-19 washed up on our shores. Now, thanks to the Fed keeping interest rates near zero, refinance rates have come down even further to an average between 2.89% and 3.54% as of March 2020.
Here are a few circumstances where it might make sense to refinance your student loans right now:
- If you still have multiple student loans to consolidate
- If your credit has recently gone up and you want to lock in a lower rate
- If you want to lower your monthly payment thanks to lower interest rates
- If you need to release a cosigner, like a family member, from the original loan
Cons of refinancing your student loan right now
It’s generally always a good idea to refinance private student loans if it makes financial sense for you, because private loans don’t offer the type of protections federal loans do. It’s federal student loans that you need to be more careful with. When you refinance a student loan that was provided by the government, you may lose the ability to have your loans forgiven under one of the government’s forgiveness programs.
Another con to refinancing a federal student loan is that you’ll be locked into the repayment plan for the life of the loan. Federal loans give you the flexibility to alter your repayment plan, say from a 10-year standard plan to a 20-year income-based plan. When you refinance these loans with another lender, that flexibility goes away and you’re locked into whatever plan you choose at the time of applying.
To put it simply: private loans are not eligible for forgiveness, so the only thing you typically need to consider with private loans is whether you’ll save money by locking in a lower rate. When it comes to federal loans, check to see if you’re on a path to forgiveness before rushing to refinance.
FAQs for refinancing your student loan during COVID:
If I refinance a federal loan, can I still qualify for any forgiveness? No, once you refinance a federal student loan with a private lender you are no longer eligible for the same benefits.
What credit score do I need? According to NerdWallet, you’ll want a score that’s at least in the high 600s.
Should I refinance my federal loan only, or private loans too? Use this infographic to see if you should refinance some, all, or none of your loans.
How much money will I save by refinancing? When deciding whether to refinance your student loan, start with this refinance calculator to determine if the potential savings are worth it for you.
The bottom line
When refinancing your student loans, always look at private and federal loans separately. If you’re on an income-driven repayment plan, or are eligible for federal loan forgiveness based on your occupation, it may not make sense to refinance your student loans. On the flip side, if you’re paying a high interest rate with a private lender, or if you are not eligible for any federal loan forgiveness, it likely makes sense to refinance to a much lower rate.