Refinancing your student loans is a smart way to reduce your monthly payment, lower your loan interest rate, or — in many cases — both. That’s especially true in today’s low-rate environment, where private student loan rates dropped as much as 37% in the last two years.
Many people have been asking: Is now a good time to refinance student loans?
Some argue now is the best time to refinance student loans and save money, thanks to the Fed's emergency rate cuts that dropped rates to zero and gave borrowers some much-needed relief. If you're financially stable (have excellent credit and steady income), then refinancing student loans now could save you thousands of dollars in interest.
But before you refinance student loans, there are several things to consider.
- Today's student loan refinance rates
- Your credit score and income
- The type of student loans you have
1. Today’s student loan refinance rates
Interest rates have been dropping for some time on student loans — but the more important factor is the rate you currently have on your existing loans. How does it compare to what’s being offered by lenders today?
As Randy Lupi, regional vice president of Equitable Advisors, explained: “With interest rates at all-time lows, it makes perfect sense for people to take a look at the current interest rate on their student loans and see if they can refinance to a lower rate. It’s almost always worth refinancing, even for a half a percentage point savings.”
Credible can reveal what rates you qualify for when refinancing. You can compare student loan refinancing rates from up to 10 lenders without affecting your credit. Plus, it's 100% free!
Then, use that data — plus your current loan interest rate — and calculate out the savings using an online student loan refinancing calculator. This will let you know if securing a lower interest rate will help you save money long term.
2. Your credit score and income
Having a good handle on your personal finances is critical before refinancing student loans, too. As Craig Borkovec, a financial advisor with Miracle Mile Advisor, put it, “A borrower’s financial situation is extremely important. At the end of the day, a lender needs assurance that the loan they are offering will be paid back — plus interest.”
There are two things you should check before starting the application process:
- Credit score
Credit score: If you have bad credit, you’ll want to work on improving it before applying for your refinance or, at the very least, consider a high-credit cosigner release.
“Student loan refinancing loans are considered super-prime,” said Kevin Walker, CEO at CollegeFinance.com. “They’re available only to those with relatively strong credit and income. Borrowers will typically need a credit score above 680, and to get the best rates, their score will likely need to be close to 800.”
If you have an excellent credit score and are confident in your credit history, then you can plug that information into Credible's free online tools to check your rates instantly.
Matt Logan, a certified financial planner based in Greensboro, N.C., agreed.
"Currently for borrowers with good credit, student loan rates and refinancing options can be found in the low threes, which is highly competitive for borrowers," Logan previously explained.
Income: Having a steady and proven income source is another way to offer assurance you'll get approved to refinance your student loans, Borkovec said, as is avoiding new debt (loans, credit cards, etc.) in the six months before applying for the loan.
If you have a good credit score and steady income, then the application process should be smooth. You can get started on Credible.com now.
3. The type of student loans you have
Finally, know what type of student loans you have: there are federal and private student loans.
If you have a federal student loan — or those offered through the U.S. government — then you'll need to consider its perks (which private student loans don't have).
These perks include things like loan forgiveness if you go into a public service career, income-based repayment plans, and the current payment and interest waiver created through the CARES Act. This allows federal student loan borrowers to skip their monthly payments through at least December 31, 2020, due to the coronavirus pandemic.
Refinancing your federal loans into a private loan would mean forfeiting those benefits. As Lauren Anastasio, a certified financial planner with SoFi, explained, “Many student loan borrowers choose to refinance to obtain a better interest rate or lower monthly payment, but those benefiting from the waiver won’t find a rate better than 0% or a payment lower than $0, which is what they temporarily have today.”
When to wait it out
Low rates or not, refinancing isn’t right for everyone, particularly if you have:
- Bad credit
- Federal student loans
- No income (between jobs)
- Credit card debt
There are other situations when waiting might make sense, too. “If you're between jobs, definitely hold off unless there are other income sources offsetting the liabilities in your life,” Borkovec said. “If you have higher credit card balances but know a bonus is coming in the near future that could help pay that down, waiting to apply after paying those credit cards or loans down is the smart thing to do.”
At the very least, check your rates and consider several student loan refinancing companies before refinancing student debt (Credible can do this without hurting your credit).
Paying for college doesn't have to be stressful. Take advantage of low rates now to save money and time paying off your student debt. Use a student loan refinancing calculator to see how lower rates and switching repayment plans could help save money.
You might also want to consider speaking to a financial advisor or credit counselor, depending on your financial situation.