More than six in ten (62%) Americans who graduated college in 2019 have student loan debt and owe an average of $28,950, according to an report released by The Institute for College Access and Success, a nonprofit group.
It’s not all bad news: Federal student loan interest rates have dipped below 3% – and some private student loan rates are even lower. This could make refinancing student loans an attractive option for many.
The best interest rates are available only to borrowers with strong credit profiles and high incomes. And depending on the type of student loans you have, refinancing could be a bad move.
Right now, all payments, interest, and collections have been suspended for government-held federal student loans. The forbearance and interest freeze for federally held student loans is currently scheduled to end on . So until then, there’s little reason to consider refinancing those types of loans. You’re never going to beat a 0% interest rate, so certainly for the time being at least, there’s no reason to [refinance federally held student loans], Adam S. Minsky Esq., who is an attorney specializing in student loans.
When Student Loan Refinancing Doesn’t Make Sense
I’m very cautious about recommending that folks refinance any federal loans to a private loan because of what you’re giving up, Minsky says.
There are a number of benefits and protections federal student loans may qualify for: death or disability discharge, default resolution, and deferment or forbearance options. Federal student loans can be eligible for repayment plans based on your income and loan forgiveness if you make qualifying monthly payments while working full-time for an eligible employer.
That’s a lot to give up – and going that route would make sense only if you can drastically reduce your interest rate or pay off the loans quickly. Even then, Minsky recommends mitigating some of the risk by having a fully funded emergency fund and adequate life and disability insurance.
Instead of refinancing federal student loans, you can take advantage of the federal student loan consolidation program. When you consolidate federal loans you retain all the benefits, but the interest rate is a weighted average of the previous loans. It won’t reduce your interest rate, says Mark Kantrowitz, vice president of research at savingforcollege, but it does have other benefits.
When you consolidate, all of your loans are folded into a single, easy-to-manage payment. You may also be able to extend your repayment term with a consolidation and lower your monthly payment. Keep in mind, just like with a private loan refinance, when you extend your loan you’ll increase the amount of interest you’ll pay over the long haul.
When to Refinance Student Loans
If you have a private student loan, refinancing Extra resources usually makes sense when you can save on interest over the long haul or lower your monthly payments.
Cutting your interest rate by just one percentage point on a $37,000, 10-year loan could save you roughly $18 a month and $2,200 in interest over the life of the loan. And you have the potential to save much more if you’re refinancing higher-interest debt, like graduate school student loans. Even if you can’t qualify for a lower interest rate, refinancing that same loan into a 15-year term would save you about $100 per month.
Pro Tip
But a word of warning: Whenever you extend a loan’s term you’ll end up paying more interest over the life of the loan. For the example above, you’d pay over $5,500 more in interest by adding five years to the loan term.
