Thanks to the Federal Reserve's decision to cut interest rates, the timing could be right to consider refinancing debt. While you may be wondering if you can get a better deal on your mortgage, credit card or personal loan, it's also important to think about where student loan refinancing fits into your financial plans.
Why are interest rates so low?
Rates have taken a steep drop mainly thanks to the economic fallout from the coronavirus pandemic.
"Interest rates are so low right now because they're set based on the 10-year Treasury, which is closely tied to the Federal Reserve rate," said Matt Logan, a certified financial planner based in Greensboro, North Carolina.
In March, the Fed instituted emergency rate cuts dropping rates to zero to help stimulate the economy. While that may be discouraging if you're a saver hoping to bank higher yields, it's good news if you owe student loans.
"Currently for borrowers with good credit, student loan rates and refinancing options can be found in the low threes, which is highly competitive for borrowers," Logan said.
You can use online tools to compare multiple lenders at once and identify whether you’ll have access to beneficial rates.
How to decide whether student loan refinancing makes sense
While lower interest rates can be alluring, it's important to do your research when deciding whether to refinance private student loans.
Logan said that starts with considering things like the interest rates you're currently paying on private student loans, whether those rates are variable or fixed, and your current payment terms. From there, you can begin exploring your options.
"You have very little to lose other than your time in completing the application."
For example, if you have private student loans with a variable rate Logan said it might make sense to refinance those loans to lock in a lower rate for the long term. Or if you already have private loans at low fixed rates, it may be worth getting a rate quote to see if you could reduce interest even further.
"You have very little to lose other than your time in completing the application," Logan said. And if you have a better credit rating than you did when you initially applied for private student loans, you may have greater odds of qualifying for the lowest interest rates.
If you have federal student loans, consider carefully the benefits you might be sacrificing by refinancing them with a private student loan lender. That includes losing potential deferment and forbearance options, as well as the opportunity to choose income-driven repayment plans.
Private student loans aren't required to offer those same benefits so keep the big picture in sight. "Be careful not to just evaluate interest rate vs. interest rate as you might with other loans," Logan said.
How to get the best student loan refinancing offer
If you're trying to compare student loan refinancing offers the best place to start is online.
"It's easier than ever to apply to refinance student loans privately," Logan said.
It's also helpful to check your credit score before comparing offers or getting a rate quote. This can help you better gauge what type of rates you're most likely to qualify for.
Finally, don't be afraid to ask for help, said Logan. "If options are overwhelming, consult with a financial professional."
When refinancing student loans may not be the right move
While low-interest rates can make student loan refinancing appealing, it doesn't always make sense.
For example, Logan said it may not be advantageous to refinance federal student loans if you're on an income-driven repayment plan and you need a lower payment because your income has dropped. Even if you could get a lower rate, your monthly payment may increase, which could make keeping up with your loans harder.
Logan said you should also think twice about student loan refinancing if you have the opportunity to qualify for any type of loan forgiveness. And of course, if you've already paid off the majority of your loans, refinancing may not yield any real savings, despite lower rates.
If you're on the fence about the benefits of refinancing, there are online tools that can help. A student loan calculator can help you estimate what your payments might be if you decide to refinance.