If you have federal student loans, you’ve likely been taking advantage of the federal loan payment freeze. Since 2020, payments have been paused. But that’s scheduled to end soon. Currently, the federal payment freeze is scheduled to end 60 days after the Supreme Court makes a decision about the legality of President Biden’s loan forgiveness plan or 60 days after June 30, 2023 — whichever comes first.
Now that payments are set to resume, is now a good time to refinance student loans? Whether it makes sense to refinance depends on your goals, the interest rate on your current loans, and your overall financial situation.
What is Student Loan Refinancing?
Student loan refinancing is a process of combining your existing loans into a new loan with different terms. To refinance your loans, you take out a loan from a private lender and use it to pay off the current accounts.
In many cases, you can refinance and qualify for a lower interest rate than you currently have, so refinancing can help you save money and pay off your loans faster.
However, there are some drawbacks; when you refinance federal loans, you transfer them to a private lender. You’re no longer eligible for benefits that apply to the federal loan program, such as income-driven repayment (IDR) plans, the federal payment freeze, or student loan forgiveness.
How the Fed Funds Rate Impacts Student Loan Refinancing Rates
The Federal Reserve aims to keep the inflation rate at about 2%. When it gets too high, the Fed may institute interest rate hikes in an attempt to reduce inflation.
The Fed’s rate hikes don’t directly affect student loan rates. But the Fed’s rate hikes do influence 10-year Treasury rates, which is what many banks and credit unions use to determine their rates.
Generally, when the Fed raises rates, you can expect lenders to raise rates on a range of credit products, including auto loans, mortgages, and student loans.
In July 2022, inflation reached a staggering 9.1%. In 2023, inflation is still well above the Federal Reserve’s 2% target; it was 6.0% as of March 2023.
As a result, the Fed has increased rates several times. On March 22, 2023, the Fed introduced yet another rate hike, raising rates by another 0.25%. The latest increase brings rates to a range of 4.75%-5.00%. To put those numbers in perspective, the target range was 0.00%-0.5% in 2021.
The rate changes won’t affect the rates on existing federal student loans; federal loan rates are fixed for the duration of the loan term. But if you were planning on refinancing your loans, higher rates may be on the horizon, so refinancing before those rate increases happen may make sense.
How Student Loan Refinancing Can Potentially Save You Money
If you have good credit and a steady source of income, student loan refinancing can be an effective way to manage your debt and save money. How much you can save depends on the rate of your existing loans, current refinancing rates, and your selected loan term.
For example, let’s say you had $30,000 in Grad PLUS Loans. Depending on when you took out the loans, you could have a rate as high as 7.6%. Under a standard repayment plan over 10 years, your monthly payment would be $357.67, and you’d repay a total of $42,920.
If you refinanced your loans today, you could qualify for a 10-year loan at 5.25%. Your monthly payment would drop to $321.88, and you’d repay just $38,626 — you’d save $4,294 by refinancing your loans.
You can use the student loan refinancing calculator to find out how much you could potentially save by refinancing your loans.
How Much Could You Save Monthly or in Total Interest?
When the federal payment freeze ends, student loan payments will resume, which could be a hardship for many people. According to a recent study released by Morning Consult, 58% of student loan borrowers said they are unable to afford their payments.
Federal loan borrowers can take advantage of benefits like IDR plans or financial hardship forbearance. However, not everyone qualifies for those perks. For borrowers that aren’t eligible, refinancing is another way to reduce their payments or save on their total repayment costs.
When you refinance, you can select a new loan term. Lenders like ELFI offer loan terms as long as 20 years. By opting for a longer term, you can slash your monthly payments.
For example, if you had $30,000 in loans at 7.6% and refinanced them with a 20-year loan at 6.5%, your payments would decrease to $223.67 — a savings of $134 each month compared to the original loan terms.
However, keep in mind that the longer term will give you a higher interest rate, and you’ll pay more in interest charges with the longer repayment period.
Should You Wait Until Forbearance is Over to Refinance?
The federal payment freeze could last for a few more months. But waiting to refinance could be a mistake. As interest rates rise, waiting could cause you to miss out on low rates and cause you to pay more over time.
For example, if you were to wait until 5/1/2023 to refinance to a 10-year term, and we experienced just a 0.25% rate increase, the rate on a 10-year loan could increase to 5.50%. Your total savings would decrease by $444.
The example below highlights what you would pay with the different loan terms.
10-Year Terms
| Principal | Interest | Total Payments | |
| Original Loan Term | $30,000 | $12,920 | $42,920 |
| Refinance at 5.25% on 3/1/2023 | $30,000 | $8,626 | $38,626 |
| Refinance at 5.50% on 5/1/2023 | $30,000 | $9,070 | $39,070 |
| *hypothetical rates | |||
20-Year Terms
| Principal | Interest | Total Payments | |
| Original Loan Term | $30,000 | $12,920 | $42,920 |
| Refinance at 6.50% on 3/1/2023 | $30,000 | $23,681 | $53,681 |
| Refinance at 6.75% on 5/1/2023 | $30,000 | $24,746 | $54,746 |
| *hypothetical rates | |||
With a higher rate after the Fed hike on a 20-year loan, your total repayment cost would be $1,000 higher than if you refinanced earlier in the year.
Will Federal Forbearance Be Extended Again?
The initial federal payment freeze was designed to last only a few months. But it’s been expanded several times, so borrowers haven’t had to make payments in nearly three years.
Many borrowers hope it will be extended again, but at this point, it seems unlikely. Borrowers should expect to make payments 60 days after June 30, 2023, at the latest.
How to Refinance Your Student Loans
Weight the pros and cons of refinancing to decide if it’s right for you. If you have high-interest loans, loans that are ineligible for the federal payment freeze, or loans that don’t qualify for loan forgiveness, refinancing now to take advantage of low rates could be a smart decision.
If you’re wondering how to refinance your student loans, it’s a simple process; you can refinance your loans in just three easy steps:
Compare Lenders
Rates, fees, terms, and policies vary by lender, so shop around and compare student loan refinancing lenders to find the best deal for you. With ELFI, you can use the rate check tool to see your loan options without impacting your credit score.
Complete the Application
Once you find a lender, you must complete a loan application. Generally, you’ll need to provide the following information:
- Your Social Security number
- Contact information, including your mailing address
- Proof of income, such as recent pay stubs or tax returns
- Employer information
- Loan account numbers
- Form of identification, such as a driver’s license
You’ll also need to undergo a hard credit check, which can cause a temporary decrease to your credit score.
Approval and Repayment
After you submit the application, the lender will review it and notify you about its decision. The process can take anywhere from a few hours to a few days.
If the lender approves your application, it will work with your existing loan servicer to pay off your loans. Until you receive a notification that the loan is paid in full, continue making payments to avoid late fees or penalties.
If you overpay during the refinancing process, don’t worry — the excess funds will be refunded to you.
Refinance Your Student Loans with ELFI
As inflation continues to be a major problem, the Fed raised rates again to combat the issue. As a result, interest rates on student loan refinancing and other forms of credit will likely increase too. Refinancing now can help you secure a lower rate and save money over the life of your loan. See how much you could save by using the ELFI student loan refinancing calculator.*
With ELFI, you can have up to 20 years to repay your loan, and rates start as low as 4.53% on variable-rate loans. To start the refinancing process, use ELFI’s Find My Rate tool.
