The average consumer loan debt has a balance of around $37,172, according to debt.org, and the average borrower pays between 4.53 percent and 7.08 percent in interest. If you have student loans, you may be considering refinancing to take advantage of the lower interest rates resulting from the coronavirus pandemic.
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Refinancing can potentially save you thousands if you’re able to snag a lower interest rate than your current loan agreement. Find out what new rates you qualify for by inserting some information into Credible's free online tool.
1. Understand the type of student loan you have
It’s essential to understand the type of loan you have because you’ll have a clearer picture of what kind of refinance you qualify for or even if a refinance is a good idea. For example, if you have a federal student loan, you may want to wait until after September to refinance your loan. The federal government has suspended all federal student loan payments and reduced the interest rates on the loans to 0 percent. You’re not going to find a better deal than that in the private sector.
If you have private loans, FEEL loans or HEAL loans owned by commercial lenders, or some Perkins Loans, you won’t qualify for the deferment or 0 percent interest rates, so now may be the perfect time for you to refinance. Check and see if you're eligible for a better interest rate than what your current lender gives you. This is ideal for fully employed borrowers with no credit blemishes.
However, it's important to note that you cannot refinance into a federal loan. If you choose to refinance your current federal student loan, you’ll lose any benefits that apply to that type of financing.
2. You can refinance all or some of your student loans
If you have multiple student loans, you can refinance some, all, or none of them. For example, if you have some federal student loans and some private loans, you could refinance the private loans and leave the federal loans as they are. Further, if you have student loans with low rates (under 3.5 percent), refinancing may not benefit you.
If you have any form of private student loans, then you may want to compare lenders via Credible and see if you can strike a deal that will save you money.
Alternatively, you could consolidate all, or some, of your student loans to simplify monthly payments. Consolidating your student loans may also reduce the amount you pay each month.
3. Your credit score plays a role
When you reconsolidate a loan, you replace your current loan with a new loan. Qualifying for a refinance is like qualifying for a regular loan. Lenders will look at your credit score, income, and employment history before approving your refinance application. Before applying, make sure your credit score is solid.
You can improve your credit score by making payments on time, reducing the total balance on open accounts, and reducing your debt-to-income ratio. You may want to request a copy of your credit report to check for any errors or open accounts you may have neglected.
You can use an online tool like Credible to prequalify for a refinance without hurting your credit score. Comparing multiple offers will allow you to identify whether you’ll have access to beneficial rates.
4. Lenders offer different rates (so do your research)
If you feel confident that a refinance is the right decision for you and you’re comfortable that your credit score and financial history will allow you to qualify, it’s time to research.
You should compare rates from several lenders at once. Make sure to check out the fees they charge. Since a refinance is akin to taking out a new loan, you’ll likely have some expenses like a loan origination fee and closing costs. And don’t forget to ask if the lender charges an early repayment penalty.
5. How to figure out if refinancing will help you long term
Once you’ve narrowed your search down to a few lenders, run the numbers. Make sure that you'll save as much or more than the cost of your refinance. Ideally, you should only consider refinancing a student loan if you can snag a lower rate and/or consolidate multiple loans into one payment.
You should only refinance your student loan if you save money. That could mean a lower monthly payment or less money paid over the life of the loan. If you need an income-based repayment plan or your credit score is in the low 600s or below, refinancing isn’t a good option for you right now.