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Some student loan refinancing rates are currently very low (fixed rates of Credible and Serious from 2.5% or less, and variable rates from Serious and Loan key start at less than 2%), but even in this low interest rate environment, a refi is not the right answer for all borrowers. Here’s what to consider before refinancing your student loans, and exactly how much a refi could save the average borrower.
Why refinance your student loans?
The main reason to refinance your student loans, of course, is to save money. Mark Kantrowitz, student loan expert and author of How to Appeal for More College Financial Aid, says student loan refinancing can save money in two important ways. “One is if the refinancing lowers the interest rate and the other is if the refinancing gives a shorter repayment term,” says Kantrowitz. A shorter repayment term results in a higher monthly payment, but reduces the total interest paid over the life of the loan. “The shorter the repayment term, the lower the interest rate. This is because lenders consider the likelihood that interest rates will start to rise over time, ”Kantrowitz explains.
The lowest rates currently tend to be on variable rate loans (variable rates of Serious and Loan key start at less than 2%), but these lending rates will most likely increase, so generally a fixed rate loan is preferable (fixed rates from Credible and Serious start at 2.5% or less), experts say. That is, unless you know you can pay off the loan quickly (student loans usually don’t have prepayment penalties).
Having said that, “be careful about refinancing federal loans into private student loans, as this will lose you the best benefits of federal loans,” he adds. And Andrew Pentis, certified student loan advisor and debt expert at StudentLoanHero, notes that: “Borrowers who lack financial security may ignore refinancing their federal loans even after the moratorium ends. After all, refinancing would permanently deprive federal loans of their potentially useful collateral, such as access to income-based repayment plans, deferral and forbearance programs, as well as current and current loan cancellation programs. potentially future, ”explains Pentis.
How much could refinancing save you?
With refinancing rates at historic lows, borrowers could save hundreds or even thousands of dollars over the life of their repayment. “Each borrower’s potential savings are specific to their loan details – the remaining balance, the loan term and the interest rate, and depend on whether they can lower their interest rate or shorten the loan repayment term. refinanced, ”explains Pentis.
Kantrowitz says borrowers often mistakenly believe that cutting the interest rate in half will cut the monthly payment in half. “It actually cuts the payment down to just 10-20%, depending on the repayment term, because the bulk of the payment goes to principal, not interest,” Kantrowitz explains.
So what could this look like in terms of actual savings? The average borrower has about $ 39,350 in loans outstanding and an average interest rate of 5.8%, according to data from New America. If this borrower had a 10-year loan at that rate, but refinanced at the same term with a 3.8% loan, he would save about $ 4,600 over the life of the loan. Shortening the term of your loan could save you even more money. In this same scenario, if you reduced the loan term to 5 years, even though the interest rate was the same, it would generate a total savings of around $ 8,600, although the monthly payment would increase significantly. This useful calculator can help you figure out how much you could save. (Note that the fixed rates of Credible and Serious from 2.5% or less, and variable rates from Serious and Loan key start at less than 2%)
How do you know if refinancing your loan is right for you?
Pentis says student loan borrowers should consider refinancing in a few different situations. “If their finances are on solid footing and they want to save money in repayment, or if their financial institution is on more fragile bases and they want to reduce their monthly payments,” he says.
Meanwhile, financial attorney Leslie H. Tayne says refinancing can be a good decision if you have private loans, have great credit, and want to save money with a new loan with a rate of. lower interest. “Refinancing to a new term will likely result in a lower monthly payment if the rate is lower than what you are currently paying, freeing up cash for other expenses,” says Tayne.
Kantrowitz also believes that nothing should prevent private student loan borrowers, who are not eligible for the payment break and interest waiver, from refinancing their private student loans if they can qualify for a rate of interest. lower interest.