Should You Refinance Student Loans Now? Here’s What the Numbers Say.

Update 4/6/2022: On April 6, 2022, The Biden administration announced that it is again extending the payment pause on federal student loans through August 31, 2022.

On December 22, 2021, the U.S. Department of Education extended the federal student loan payment pause until May 1, 2022. This means that federal student loans aren’t accruing interest and payments aren’t required until that date. When looking at this situation, many federal student loan borrowers might be tempted to put off refinancing their student loans.

However, before deciding not to refinance sooner rather than later, it’s important to consider the situation and evaluate the lay of the land. Currently, student loan refinance interest rates are near historic lows – and with the Federal Reserve projecting higher rates through 2022, borrowers may miss out on these historically low rates if they wait to refinance.

How the Fed Funds Rate Impacts Student Loan Refinancing Rates

The fed funds rate, the benchmark that we often think about when we talk about rate hikes, doesn’t directly impact student loan rates. However, the fed funds rate does influence 10-year Treasury rates, which many lenders use for guidance when offering interest rates to consumers.

In general, if the fed funds rate is heading higher, we can expect other rates to follow suit. Whether it’s student loan refinancing rates, credit card interest rates or mortgage rates, higher rates impact how much consumers pay when they borrow money.

Rates are already starting to creep up, and the Fed has signaled that it will be raising rates throughout 2022. In fact, Federal Reserve Chair Jerome Powell signaled support for a 25 basis point rate increase in the Federal Reserve’s March meeting.

For those who expect to stick with their federal student loans because they’re on income-driven repayment or expect to make use of Public Service Loan Forgiveness (PSLF), rate increases won’t likely cause a problem. Borrowers with federal loans have fixed rates on their loans. However, for those who are interested in lowering their interest rate or saving on their monthly payments through refinancing their debt, refinancing before rates move higher can make sense.

How student loan refinancing can potentially save you money

Student loan refinancing can help you reduce your monthly payments or help you pay less in interest over the life of your loan, depending on your situation. Because rates are expected to begin rising in March, refinancing your student loans now — before the end of the current pause of federal student loan interest and payments on May 1, 2022 — could help you lock in long-term savings.

Let’s take a look at the potential interest rate increases and whether it makes more sense to refinance student loans now, wait until the payment pause ends and refinance later, or not refinance at all.

In the following scenarios, we referenced the interest rates of 2021 undergraduate and graduate subsidized and unsubsidized federal student loans, along with the average private student loan interest rate in 2021 to arrive at a weighted average interest rate of 5.13%. We also assumed the borrower had $35,000 in undergraduate student loans and $70,000 in graduate student loans. While the interest rates and loan amounts among different borrowers may vary, these numbers are an attempt to provide a baseline scenario for someone who graduated in 2021.

To estimate your own potential savings through refinancing, you can use ELFI’s student loan refinance calculator to run the numbers.

How Much Could You Save Monthly or in Total Interest?

Once the federal forbearance ends, borrowers are expected to begin making payments again. According to a recent report, 93% of federal loan borrowers aren’t financially prepared to begin making student loan payments again. If you don’t qualify for income-driven repayment, you might not be able to afford your loans at your current repayment plan. Even if you consolidate your federal loans for a longer repayment period, your average weighted interest rate might be higher than what you could get by refinancing those loans instead.

Let’s assume you are currently on a standard 10-year repayment term with $105,000 in total loans, with the weighted average interest rate of 5.13% stated above. If you were to refinance on 3/1/2022, qualify for ELFI’s best rate as of 3/1/2022 (2.98% APR¹), and keep your 10-year term, your monthly payment would decrease from $1,129.56 to $1,012.92, saving you $116.64 in interest each month, which adds up to $13,997.54 in total savings over your loan term.

Another option would be to refinance to a 20-year term to reduce your monthly payment. Using the same loan balance and rate, refinancing to a 20-year term and qualifying for ELFI’s best rate as of 3/1/2022 (3.28% APR¹) would reduce your monthly payment from $1,129.56 to $597.15, saving you $532.41 per month. In this scenario, you would only pay $7,769.32 more in total interest while enjoying significant monthly savings.

Should You Wait Until Forbearance is Over to Refinance?

Despite federal student loans currently being on 0% interest with no payments required, the expected scenario of rising interest rates could actually cause you to save less if you wait to refinance. For example, if you were to wait until 5/1/2022 to refinance to a 10-year term, and we experienced just a 25 basis point rate increase, your total savings in interest would decrease by $1,458.57 in comparison to refinancing on 3/1/2022. In a more extreme scenario, if we experienced a 100 basis point rate increase, and you refinanced on 5/1/2022 to a 10-year term, your total savings in interest would decrease by $5,898.89 in comparison to refinancing on 3/1/2022.

The chart below outlines the total interest you would pay in these scenarios, in addition to a scenario in which you pay $1,000 per month until the federal forbearance expires and elect not to refinance at all.

Additionally, the same logic applies to those considering extending their loan term. As stated above, refinancing to a 20-year term and qualifying for ELFI’s best rate as of 3/1/2022 would reduce your monthly payment from $1,129.56 to $597.15, saving you $532.41 per month, while you would only pay $7,769.32 more in total interest. If you were to wait until 5/1/2022 to refinance to a 20-year term and we experienced a 25 basis point rate increase, the additional interest you would pay over your loan term would increase by $3,234.93 in comparison to refinancing on 3/1/2022. In a more extreme scenario in which rates increased 100 basis points by 5/1/2022, the additional interest you would pay over your loan term would increase by $13,188.23 in comparison to refinancing on 3/1/2022. The chart below outlines the total interest you would pay in these scenarios when refinancing to a 20-year term.

What if the Federal Forbearance is Extended to 2023?

Considering the fact that the federal student loan forbearance has been extended multiple times, many borrowers may also be faced with the question of whether it would pay off to refinance their student loans now, even if the federal forbearance was extended further. In these scenarios, we assumed that rates increased further, using a range of 50-200 basis points. The charts below show the total interest that would be paid in the case that the federal forbearance was extended until 1/1/2023.

As you can see from the charts, waiting to refinance until 1/1/2023 in this hypothetical scenario could still lead to missing out on refinance savings. For example, if you refinanced to a 10-year term on 3/1/22 and qualified for ELFI’s best rate, you would pay $16,550.25 in total interest. If interest rates increased 50 basis points by 1/1/2023, then you would pay $19,478.18 in total interest, a difference of $2,927.93. You would still technically save $11,069.61 in total interest, but your savings would be cut due to the higher interest rate – and as you can see from the chart, if rates went higher, your savings could almost diminish completely.

This hypothetical scenario is even more impactful when refinancing to a 20-year term, where interest rates play a larger role in how much interest you pay over the longer term. Thus, if the Federal Reserve feels the need to accelerate interest rate hikes due to rising inflation, waiting to refinance could prove costly to many federal student loan borrowers.

Bottom Line

As a borrower, figuring out how to reduce interest costs is vital to making the most of your money. If you aren’t planning on using federal programs like income-driven repayment and PSLF, it can make sense to refinance your loans, rather than stick with the standard repayment plan or even consolidate your loans. Current rates are low enough that eligible borrowers can potentially lower their rates from what they are currently paying on their federal undergraduate and graduate loans.

Once more, if you currently have high-interest private student loans, now could be the most opportune time to refinance them before rates rise. Check out our Student Loan Refinance Calculator to see what you could potentially save, then prequalify with ELFI in minutes without affecting your credit score.*

¹APR = Annual Percentage Rate. The rates utilized in hypothetical scenarios are ELFI’s lowest fixed rates for 10-year and 20-year terms as of 3/1/2022. Rates are subject to change.