Should you be refinancing your student loans now?

With the Federal Reserve raising interest rates throughout 2022, it may seem like the perfect time to refinance your student loans and lock in a low, fixed interest rate. 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 are the reasons to refinance?

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 combine all of your loans into one new payment with new terms and a new interest rate.

Refinancing your student loans allows you to secure better repayment terms for your financial situation. You can get longer repayment periods and a better interest rate, depending on what the lender offers you. It is also an opportunity to simplify your payments into on single payment, making it easier to keep track of.

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. A longer repayment term will make your loan more expensive overall and lower your monthly payment.

Refinancing is done only through private lenders, so any federal loans you refinance will be converted into private loans. You’ll lose federal protections like deferment, forbearance and Public Service Loan Forgiveness.

When refinancing, it’s important to shop around and compare multiple lenders to ensure 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.

Federal borrowers should now avoid refinancing since the government has paused payments and interest charges on federal loans until October 2023 — 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. It would also be advisable for most to wait until after the on-ramp program the government has established to ease borrowers back into repayment.

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.
• You have a variable interest rate.

Who shouldn’t refinance right now?

You should skip refinancing if:

• You have federal student loans.
• You plan on taking advantage of federal student loan benefits in the future.
• 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 you get the best deal out of the process.

1. Compare lenders

Every lender sets its own rates, repayment terms and features, so comparing 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 also changes, 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 great 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 if 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 as interest rates continue to rise. However, if you have federal loans, it’s likely best to wait until the period of administrative forbearance ends.