Should you rush to refinance your student loans? (To analyse)
By Cecilia Clark | NerdWallet
Even with federal student loan forbearance and talk of forgiveness prospects, student loan interest rates still matter — and nothing underscores that point better than the likelihood of them rising soon.
Private student borrowers, whose payments are not suspended and who will not benefit from any federal cancellations, may be wondering if now is their last chance to refinance at interest rates near historic lows.
The answer is yes.
Goldman Sachs experts predict up to seven hikes in the target federal funds rate this year, but rates may also rise in anticipation of that. In December 2021, refinance rates on a 30-year mortgage hovered just below 3.1%. Now they are right by around 4%, according to data from NerdWallet.
Chad Pastorius, head of strategic planning at nonprofit lender Rhode Island Student Loan Authority, explains that while interest rates on student loans may be tied to different factors than typical mortgage rates, the combination of the trajectory mortgage rates, advance warnings of federal hikes and record inflation send a good signal of what’s to come for student loans. And depending on the funding model, some student loan refinance lenders have already had to raise rates.
But that doesn’t mean all student borrowers should ditch everything and refinance now. Here are the borrowers who should rush to refinance and those who have reason to wait.
Rush: Private student loan borrowers with stable income
Those with private student loans do not have the ability to resist possible student loan cancellation. The best way to pay off these loans quickly and with the greatest discount is to lower your interest rate through refinancing.
And the best time to refinance your private student loans is whenever you can get a better rate than the one you already have. To qualify, you’ll need a stable income, a debt-to-equity ratio of 50% or better, and a credit score of at least 600. The better your credit profile, the higher the rate at which you can expect is low.
Typically, the available short-term refinance will also come with a lower rate, although this may mean a higher monthly payment. On the other hand, a lower interest rate with a longer loan term could get you a much lower monthly payment, but may mean higher total repayment costs.
Consider this: A borrower with student loan debt of $29,000 at 7% interest with a 10-year term will have payments of $337 per month and pay $11,405 in interest over the life of the loan.
Before deciding, check your rate offers with several lenders. You may also be able to improve your pricing plan by adding a highly qualified co-signer. Be sure to pre-qualify with lenders who will post your rate and term offer with a soft credit check, so your score isn’t affected.
Probably wait: Private student borrowers struggle to make payments
If you can’t meet your current student loan payments, refinancing may not be an option for you.
Lenders consider your credit profile, which may include your student loan repayment history. They also assess factors that likely make it difficult to track your current payments, such as income and total debt.
It is best to take the time to improve your credit profile before applying for refinancing. You may qualify with a co-signer, but make sure that person understands your financial situation and knows that they will be responsible for the loan if you cannot pay.
Wait: Most Federal Student Loan Borrowers
Refinancing is only available through private companies. This means that if you refinance your federal student loans, they will become private student loans and you will lose government safety nets. Brian Walsh, certified financial planner, or CFP, and senior director of financial planning at student lender SoFi, urges federal borrowers to consider what’s at stake when seeking a lower interest rate.
Federal borrowers who may need payment protection through programs such as income-contingent repayment, those who qualify for the Civil Service Loan Forgiveness Program, and those with student debt is low should not rush to refinance.
At a minimum, these borrowers should wait until the payment pause expires to assess their position and determine if refinancing is right for them.
Probably Wait: Federal Student Loan Borrowers with Stable Income and High Balances
Refinancing has the best value proposition for those with high student loan debt. The higher your balance, the more you benefit from even small changes in your interest rate.
So if you have a steady income and high student debt — even if it’s federal debt — it may be worth considering refinancing.
It comes down to risk tolerance, says Walsh. Federal borrowers who refinance now risk losing benefits that include the current payment pause, any extensions and any future cancellations in exchange for a lower rate.
Ron Klain, White House chief of staff, indicated that another expansion was on the table in a March 3 interview with the “Pod Save America” podcast.
If you’re looking at refinancing, consider this scenario. Let’s say you have $83,000 in debt from your graduate and undergraduate degrees. If the interest rate on this debt is 9% over a 10-year term, your payment is approximately $1,051 per month. When you repay your loans, you will pay $43,169 in interest.
Pastorius says borrowers should heed the numbers. Assuming the payment break ends in May, borrowers have an additional two months interest-free. If the interest you could save in those two months is less than what you could save from refinancing, it might be worth taking a look.
He cautions, however, that while the payment break is due to end in May, there is no guarantee that it will not be extended.
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Cecilia Clark writes for NerdWallet. Email: [email protected]