With record low interest rates, many student loans borrowers could benefit by refinancing their high private rate debt or even fixed rate federal student loans with a cheaper private alternative. Here's why refinancing your student loans could be worth it:
No fees
Simply put, there are no fees to refinance your student loans, unlike other personal credit products. On top of this, if your income improves after refinancing and you want to start making lump-sum payments, there wouldn't be any prepayment penalties if you decide to pay your student loans earlier than the maturity date.
Interest rates have declined substantially
Student loan interest rates move in tandem with the Federal Reserve's decision to cut or raise interest rates, although not directly.
While the Fed doesn't directly impact the rates set for federal student loans, federal rates should move in the same direction as the federal funds rate over time, so both private and federal student loan rates should be coming down in the near-term future with the recent Fed rate hike.
With some student loan refinance lenders having dropped variable interest rates to as low as 2.27%, student loan refinancing rates are virtually at near-term lows, and refinancing your student loan now could potentially save you thousands of dollars in interest.
More favorable loan terms
On top of being able to save big from reduced interest over the term of your loan by refinancing your private student loan, in some situations, it could also make sense to refinance your federal student loans. Generally, the new loan you replace your previous loan or group of loans with will allow you to now pay just a single monthly payment, therefore reducing headaches and hassles and streamlining your student loan repayment process.
You can also change from a fixed rate to a variable rate and even stretch out the term of the loan, further reducing your monthly loan payments. For example, if you have a loan balance of $20,000 with a 5% interest rate, your monthly payments going from a 12-year term to an 18-year term decrease from $185 to $141.
New and favorable loan terms can help you save money big time, especially if this is the first time you refinance your student loans since origination, and help you pay off your student debt faster.
Quick and simple applications
Many types of businesses over the past decade have moved from a traditional brick-and-mortar approach to interacting with a customer or client to exclusively serving customers online. Student loan refinance lenders are no exception, and are pretty reliant on technology. This means that your application can be smooth with preliminary quotes usually taking less than 3 minutes, and with almost all lenders only making a soft pull on your credit.
Even if you end up submitting multiple loan refinancing applications in a short period of time, credit bureaus usually bundle up all the soft pulls on your credit score and count it as a single hard pull. You most likely won't be reapplying to refinance your student loans again any time soon, so it could make sense to take on a hard pull to your credit score just this one time, especially if you are satisfied with the preapproved rate and terms.
Improvement in financial situation
Finally, if you've seen a solid or perhaps even 180-degree improvement in your financial situation since you took out your original student loans, you could be in the perfect spot to refinance. The rate at which you can refinance with a private lender is determined through a complex financial formula, which takes into account your credit score and a low or improved debt-to-income ratio.
If you are a borrower who may not necessarily qualify to refinance their student loans on their own, you could also consider taking on a co-signer who has a higher credit score and lower DTI to increase the chances you get approved to refinance.
What next?
It could certainly be worth it to refinance your student loans, especially if interest rates are low, as they are now, compared to other points in the market cycle.
Make sure you do your due diligence and research before deciding to refinance, and certainly shop around with multiple lenders before making a commitment. Even if you feel as if you have a low enough interest rate, if the numbers work out and you can refinance your student loans and save money in the process, it would make sense to go through with an official application to a lender since there are no origination or refinancing fees.
Keep track of your student loans via the free PeppyWallet student loan dashboard without having to sign up or make an account. The student loan dashboard can help you quantify how much your total monthly payment is, determine your overall weighted average interest rate on your loans as well as spot unique refinancing opportunities.
