Student Loan Refinance Rates Just Dropped Again. Should You Refinance?September 4, 2020
If you have student loan debt and are looking for ways to save money, you’re in luck because right now is a great time to consider refinancing your loans. Currently, refinancing rates are at an all-time historic low. As of September 3, 2020, interest rates for refinancing student loans are currently as low as 2.79% for a fixed rate. Compared this to the early 2000s when private student loan rates were as high as 9% and you can see that now is the time to take advantage of the opportunity to see significant savings. Before you decide on refinancing your student loans, it’s best to consider the pros and cons.
Pros of Refinancing Now
When you refinance student loans, it means you are obtaining a new private student loan to pay off your old loan or multiple student loans. You can refinance private and federal student loans. The new loan may have a different term length than your previous loan and will have a different interest rate (presumably a lower one) and monthly payment. Here are some reasons refinancing now could be beneficial:
Lock in a Low Rate
If you refinance now, you will be able to take advantage of the low refinancing rates being offered. Having a low interest rate helps you save money in interest costs. This can also help you pay off your loan faster if you are able to pay more than the minimum payment and can put more towards the principal of the loan. To see just how much a lower interest rate can save you, check out this example:
If you have student loan debt in the amount of $50,000 with an interest rate of 7% and a loan term of 20 years, your monthly payment would be approximately $388.00. If you refinance and qualify for an interest rate of 4.65% with the same loan term your payment would be approximately $320.00 and you would save over $16,000 in interest costs over the length of the loan. A lower interest rate can result in huge savings!
Save on Monthly Cost
If your goal is to save some money, refinancing can definitely help accomplish that goal in most cases. If you qualify for a lower interest rate, with the right loan term you can save on the monthly cost of your student loans. Based on the example above, you would see a savings of over $60 per month. In certain instances where your new interest rate is significantly lower than your previous interest rate, you may be able to shorten the length of your loan term and still save in monthly costs. This will save you money and time on your student loan!
Save on Interest over the Loan Term
If you refinance to a lower interest rate you can literally save thousands of dollars over the life of the loan. These savings can be put towards other financial goals, setting you up for a stronger financial future. Your savings rate will depend on what your current interest rate is on your loan and the new rate you will qualify for. If you are interested to see how much your savings could be, use our Student Loan Refinancing Calculator to get an idea of your savings.*
Refinancing is also beneficial to help simplify your finances. If you have multiple student loans that you are paying with different due dates, it can be difficult to keep up with all the different loans. When you refinance, you can essentially consolidate all or some of your student loans into one loan with one payment. This will make it easier to manage your finances. You will also be less likely to miss a due date and avoid having to pay late fees.
Cons of Refinancing Now
Although there are numerous benefits for many student loan borrowers, there are some drawbacks to consider before deciding whether refinancing is right for you now.
Lose Federal Borrower Protections
When you refinance federal student loans, you will obtain a private student loan, which means you will not have access to any of the federal borrower protections currently being offered due to the COVID-19 pandemic. Therefore, if you refinance your federal student loans now you will lose the following protections:
- 0% interest: an executive order was signed on August 8, 2020 extending a 0% interest rate on federal student loans through December 31, 2020. This means no interest will be accruing on your federal loans through the end of the year. If you refinance now, interest will begin accruing on your new loan at your new rate.
- Administrative Forbearance: included in the executive order extending the 0% interest rate, the administrative forbearance was also extended through December 31, 2020 meaning no student loan payments will be due on most federal student loans until 2021. If you refinance now, payments will begin being due at the start of the loan, instead of resuming in 2021.
- Other federal borrower protections that are lost when you refinance include:
- Public Service Loan Forgiveness (PSLF): if you work for a qualifying employer and have qualifying loans that you are hoping will be discharged through PSLF, it would not be wise to refinance any federal loans. Private student loans are not eligible for this program.
- Deferment or Forbearance options are more flexible with federal student loans.
Considerations to Make
If you are still unsure whether refinancing is a wise financial move for you, consider some of these options:
- Only refinance any private student loans you have and not federal loans. That way you can take advantage of a low interest rate on some of your loans, but still keep the federal borrower protections on your federal loans.
- Wait until 2021 to refinance when the federal protections of 0% interest and administrative forbearance will end, and rates may still be low. Although keep in mind rates can change and increase.
Deciding if student loan refinancing is a good idea depends on what makes wise financial sense for you. Ultimately any time you focus on your financial future and plan financial decisions, it is a step in the right financial direction!
*Subject to credit approval. Terms and conditions apply.