Student loan refinancing rates have reached record highs, with some loans starting below 2%. Should we refi now?
The refinancing rates on your student loans are at their lowest levels since the finance company Credible – which reviews rates for borrowers with a credit rating of 720 and above in their market – began tracking rates ago. is one and a half years old. Indeed, average interest rates on 5-year variable loans were 2.41%, while interest rates on 10-year fixed-rate loans were close to their all-time low at 3.35. %, for the week ending November 29. eligible depends on a variety of factors, including your credit rating, debt level, and income. For some very creditworthy borrowers, some student loan refi rates start at less than 2%, but others will pay more than average for refi.
Who should and who should not refinance their student loans?
The first big question to ask yourself when considering a refi is whether it will save you money – either by lowering your interest rate or shortening the repayment term, or both, says Mark Kantrowitz, student loan expert and author of How to Appeal for More College. Financial aid. Those who have seen their incomes rise, their credit scores improve, or who have paid off large debts may be able to obtain much better rates than they currently have. This calculator can help you determine how much you would save by refinancing. Note that while a shorter repayment term can result in higher monthly payments, it can easily save you thousands in interest. In addition, “the shorter the repayment term, the lower the interest rate. This is because lenders consider the likelihood that interest rates will start to rise over time, ”Kantrowitz explains.
The other thing you need to consider is the type of loans you have, says Kantrowitz. Those with federal loans should proceed with caution when refinancing into a private student loan. First, you’re probably currently benefiting from the federal government’s moratorium on interest-free student loan payments, which runs until January 2022.
And even after the end, it may still be a good idea to skip refinancing as it would “permanently strip federal loans of their potentially useful collateral, such as access to income-driven repayment plans, deferral programs, and forbearance as well as current and potentially future loans. forgiveness programs, ”says Andrew Pentis, Certified Student Loan Advisor and Debt Expert at StudentLoanHero. Rebecca Safier, Certified Student Loan Advisor and Debt Expert at Student Loan Hero, adds Rebecca Safier: “Make sure you have taken into account everything you are going to give up before finalizing the transaction. The federal government offers you protections that your new private lender will not.
Also see: 5 questions to ask yourself before refinancing a student loan.
Should I choose a fixed rate or a variable rate loan?
Although the lowest rates, for starters, are often on variable rate loans now (some student loan refi rates start at less than 2%), fixed rate loans may be a safer choice in the long run. If you refinance your loan at a variable interest rate, your monthly payment can go up or down – and while it could go down, which would mean a lower monthly payment, it can also increase and exceed what you would pay with a fixed rate. . -interest rate. Since fixed rate loans often have very low rates right now, those who expect to hold onto their loan for a bit will likely benefit from opting for a fixed rate loan.
How much can I save by refinancing my student loans?
The amount that can be saved by refinancing student loans varies, but it is not uncommon for borrowers to save thousands of dollars over the life of their loan. According to data from New America, the average student loan borrower has about $ 39,350 in loans outstanding and an average interest of 5.8%. If a borrower in this scenario had a 10-year loan but refinanced at the same term at 3.8%, they would save about $ 4,600 over the life of the loan. If the same person reduced their loan term to 5 years, it would save about $ 8,600 in savings. This free calculator can help you determine how much you can save.
One mistake people make when trying to value their savings, Kantrowitz says, is that they mistakenly believe that cutting their interest rate in half will cut their monthly payment in half. “It actually cuts the payment down to just 10-20%, depending on the repayment term, because the bulk of the payment goes to principal, not interest,” Kantrowitz explains.
Other things to consider when considering refinancing your student loans
While mortgage refinancing costs can be high, student loan refinancing usually doesn’t come at a high cost. Increase your credit score as much as possible in order to get the best rates. To ensure a higher credit score, make sure you pay your bills on time, catch up on overdue accounts, pay off revolving account balances like credit cards, and limit how often you apply for new loans. .
If your credit score is low, some lenders allow you to apply with a co-signer. “Adding a creditworthy co-signer to your application can help you qualify and get better rates, but your co-signer becomes just as responsible for the loan,” says Safier.