Should You Refinance Your Student Loans?

Student loan interest rates can vary widely depending upon a number of factors. One such factor is the credit score that the individual had at the time they applied, while another factor is who issued the original loan. Another factor is the loan product itself.

The most common reason that people consider refinancing is to lower their interest rate and thereby their monthly payment. If you are paying on a student loan, and think that perhaps your interest rate is too high, you may want to consider refinancing.

According to Forbes Advisor, you should only look into refinancing if you have a credit score rating of “good” or “excellent,” a stable income source, and a low debt-to-income ratio.

You’ll need to look at your current student loans critically and determine if they have high enough interest rates that refinancing would be an option. You’ll also want to consider very carefully if you look at refinancing out of a federal loan and into a private. It would not make sense to refinance if your new loan product does not lower your interest rate and may cause you to lose out on some possible relief.

There’s another point to consider when refinancing a student loan. You may be in a loan that will adjust to the current rate, which could be better than what you could get if you refinanced.

Here’s one example: Interest rates for federal loans that were issued between July 1, 2020, and June 30, 2021. These loans will drop from 4.53% to 2.75% for undergraduate Stafford loans. Conversely, private loans haven’t had a noticeable drop, but also are not expected to rise.

The key takeaway from this varying data is that you must know what your current loan product is and what it can do in regards to interest rates, benefits, and potential forgiveness. When you understand that data you can take that information and compare it to any new refinance options you are looking at.

That said, if you have private student loans, this may be one of the best times to refinance.

The following companies have scored well with both Investopedia and Forbes Advisor with the loan products they currently offer:

  • PenFed Credit Union: Stands Out for Low Rates & Flexibility
  • RISLA: Best Overall Loan Product
  • Common Bond: – Great Hybrid Loan Offer
  • Laurel Road: Excellent Parent Loan Refinancing
  • Splash Financial: Best Interest Rate
  • SoFi: Great Benefits
  • Discover: Best for No Fees
  • Citizens Bank: Ideal for Borrowers Who Didn’t Graduate

A Cautionary Note for Those with Federal Loans

In March 2020 the CARES ACT was passed to help provide relief to businesses and individuals during the pandemic. People who had federal student loans have enjoyed an interest freeze since the CARES Act was passed. President Biden extended this through September 30, 2021.

Additionally, if you do have a federal student loan, you would miss out on the potential of the federal student loan forgiveness if you refinanced with a private lender.

The final point to consider when researching student loan refinancing options is how it will lengthen the amount of time it will take you to pay off the loan. You may get a better interest rate and a lower monthly payment, but will you extend the life of your loan and is that in your best interest?

After you’ve researched, you may find that the current loan product you have is actually the best fit for you.

The best course of action however is to work with a financial advisor. If there’s one point that should be very clear to any reader, it’s that there are numerous variables that can affect your decision. Working with a financial advisor will help to assure that you don’t miss something important and choose an option that is not in your best interest.

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