With interest rates at record-breaking lows due to the COVID-19 crisis, it may seem like the perfect time to refinance your student loans. However, there’s more to refinancing than just securing a lower interest rate, especially given current loan relief options presented by the federal government. Whether you should refinance your student loans right now depends on the type of loan you have and your current financial situation.
What is student loan refinancing?
When you refinance, you take out a new loan to pay back some or all of your current student loan balance. You can refinance both private and federal student loans, and you can combine all of your loans into one new payment with new terms and a new interest rate.
Refinancing is done only through private lenders, so any federal loans you refinance will be converted into private loans. You’ll lose any federal protections, like deferment, forbearance and Public Service Loan Forgiveness.
When refinancing, It’s important to shop around and compare multiple lenders to ensure that you’re being offered a competitive rate. Private lenders use your credit score and history to determine your interest rate, so if you can’t qualify for a new loan on your own, you might need to find a co-signer who can help you.
Should I refinance right now?
While refinancing is a good idea for some, it’s not always the right idea for everyone. Refinancing is generally only worth it if you can get a lower interest rate, though you may also choose to refinance to get a longer repayment term and lower monthly payment.
Right now, federal borrowers should avoid refinancing, since the government has currently paused payments and interest charges on federal loans — refinancing would make payments due immediately. Instead, you may consider continuing to make zero-interest payments on your loans or putting the money you would be paying into a savings account or emergency fund.
|Pros of refinancing||Cons of refinancing|
|One monthly payment
Potentially lower interest rate
Switch loan servicers
Lose federal benefits and protections
High rates for borrowers with bad credit
Longer repayment term could make loan more expensive overall
Who should refinance right now?
Refinancing is a good idea if:
- You have only private student loans.
- You want to consolidate all your loans into one manageable loan.
- You’re in the first few years of your repayment period.
Who shouldn’t refinance right now?
You should skip refinancing if:
- You have federal student loans.
- You can’t find a lower interest rate than what you have now.
How to refinance student loans
If you’ve decided that refinancing is right for you, take the time to ensure that you get the best deal out of the process.
1. Compare lenders
Every lender sets its own rates, repayment terms and features, so taking the time to compare your options is key to finding the most savings. Many lenders let you see what rates and terms you’re eligible for using what’s known as prequalification — an online application that uses only a soft credit check.
After getting prequalified with a few lenders to find your most favorable terms, you should also consider unique perks. For instance, if you change jobs and your pay schedule is different, can you move your student loan due date? What are your forbearance options? Can you receive any discounts? All of these could help you decide between similar lenders.
2. Complete an application
Once you’ve decided on a lender, it’s time to complete an application. Private lenders use your credit score and history to determine your interest rate and terms, so at this point you will go through a hard credit check. If you don’t have a stellar credit score or much of a credit history, you’ll need to get a co-signer to help you qualify for a loan. A co-signer is responsible for repaying your loan in case you fail to make payments.
For your application, you’ll likely need to provide recent pay stubs, tax forms and identification. If you have a co-signer, they’ll need these documents as well.
3. Get approved and start repayment
Each lender has a different approval process, but many can approve you in a matter of days and pay off your old loans within a few weeks. Your new lender will let you know when your first payment is due.
It’s important to keep making payments on your old loans until you receive confirmation that they’ve been paid off; missing a payment while you’re waiting for your refinance to go through could ding your credit score or incur a late payment fee. Your lender can assist you with any overpayments.
The bottom line
Whether you have federal or private student loans will determine whether it’s an ideal time to refinance your student loans. Generally, if you have private loans, you could benefit from refinancing during this period of rock-bottom interest rates. However, if you have federal loans, it’s likely best to wait until the period of administrative forbearance ends.