If you're interested in refinancing your student loan, there's one very strong incentive: historically low interest rates. You can save thousands with a student loan refinance right now. In fact, that's one of the many reasons there's been a surge in refinance applications in recent months.
"Rates can't get much lower than this, so now is one of the best times ever to lock in what may be the lowest rate you'll ever see," said Jonathan Howard, a financial advisor with SeaCure Advisors in Lexington, Kentucky.
The Federal Reserve slashed interest rates to near-zero early in 2020 in an effort to mitigate the economic impacts of the coronavirus pandemic. That move resulted in interest rate drops for both federal student loans and private student loans. With the Fed Funds rate expected to stay low through 2022, that's creating a money-saving opportunity.
If you're looking to cut your student loan debt fast (and saving money is your goal), then you should visit the online marketplace Credible to learn more about the refinancing process. Just enter some simple information to see how a refinance could impact your loan payment and whether or not it could cut the life of the loan.
Before refinancing student loans, it's helpful to consider the pros and cons.
How can a student loan refinance 'increase your cash flow'?
Refinancing now could make sense if you're hoping to get a lower interest rate on your loans or you want to move from a variable rate loan to a fixed-rate loan.
"The biggest pro is that you may increase your cash flow through refinancing to a lower rate," Howard said. A lower rate means less interest paid over the life of the loan and more money you could funnel toward other financial goals.
Howard said people who may benefit from refinancing student loans include borrowers who have:
- Good to excellent credit scores and credit history
- Consistent and secure income
- Outstanding loans with rates higher than what exists in the market today
Even if you don't have perfect credit (though there are easy ways to boost your credit score), refinancing may be worth looking into if you have someone who's willing to cosign. A cosigner with a solid credit history could help you qualify for the best interest rates on student loan refinancing.
If you're curious about what kind of rates you may qualify for, you can use an online tool like Credible to compare options from different private lenders. Checking your rates won't affect your credit score.
Using an online student loan refinancing calculator can also help you estimate what your monthly payments are likely to be with a new loan. You could also gauge how much you could save on interest at a lower rate.
What happens when you refinance student loans?
Student loan refinancing simply means taking out a new loan to pay off your existing loans. Going forward, you'd make payments to the new loan.
Refinancing student loans is different from consolidating. When you refinance, you're getting a new loan from a private student loan lender, ideally with a lower interest rate and monthly payment than your previous loan.
When you consolidate student loans, you still roll your existing loans into a single loan. But this is typically associated with federal student loans and the goal is streamlining monthly payments, rather than reducing your interest rate.
Comparison shopping to get quotes from several lenders can also help ensure you're getting the most affordable loan possible as rates do vary. You can use Credible to compare student loan refinancing rates from multiple private lenders at once without affecting your credit score.
Is it worth refinancing student loans?
If you have private student loans, refinancing could help you secure a lower interest rate given where rates are currently. Refinancing multiple private loans into a single loan could also make it easier to manage your monthly payments. Just keep in mind that you may need a cosigner if you don't have a lengthy credit history.
Refinancing federal student loans could also yield a lower rate or help you get out of default but consider the trade-offs involved. If you're hoping for student loan forgiveness or you want to keep deferment and forbearance protections, you may be better off trying to consolidate your loans instead.
Getting prequalified can help you gauge whether refinancing is the right move. Use an online tool like Credible to get prequalified student loan refinancing rates from multiple private lenders.
When should you not refinance student loans?
Refinancing your student loans can potentially offer savings on interest and lower your monthly payments. But it isn't right for every borrower.
If you have federal student loans, for instance, refinancing them into a private student loan means losing out on certain benefits, such as deferment and forbearance periods. You'd also be ineligible for student loan benefits associated with the federal CARES Act, including the option to temporarily pause payments.
"Federal loans have the best consumer protections in the student loan marketplace and have forgiveness options that don't exist in the private loan space," Howard said. "Make sure you aren't forfeiting forgiveness provisions by refinancing."
The federal student loan forgiveness program could help relieve some of your student debt burden. But it requires you to enroll in an income-driven repayment plan for federal student loans, something you can't do if you refinance them using private student loans.
Also, consider how long it'll take to pay off your loans after refinancing. If refinancing student loans means adding more years to your repayment term, you could still end up paying more in interest even if you qualify for a lower rate.