Many borrowers are considering their student loan options in light of historically low interest rates, federal student loan payments on pause at least through September 2021, and discussion of student loan forgiveness by both parties. With so many factors swirling around, it can be tough to decide how to handle your student loans. That’s because there is no one “right” answer.
The era of low interest rates means that a holder of private student loans could get a lower rate than before, making refinancing attractive. Here’s what to consider about refinancing student loans.
Should Private-Loan Holders Refinance?
In September, the Federal Reserve pledged to keep interest rates near zero for the foreseeable future as an economic recovery aid. That led many private lenders to follow suit and lower their interest rates, but private lenders have slowly been raising rates since the start of 2021.
Borrowers can check current rates for refinancing—replacing multiple student loans with a single, new private loan with a single monthly payment. They’ll save money if the new loan has a lower interest rate.
Refinancing may make sense if:
- You have private student loans or a combination of private and federal student loans and can gain a lower rate. But realize that refinancing federal loans to a private loan would remove the current pause in payments and interest accrual; federal student loan forgiveness, if it comes to fruition; as well as federal income-driven repayment plans and forgiveness programs.
- You have a stable income.
- You have good or excellent credit.
- You have access to a co-signer who meets those criteria if you do not.
With refinancing, it’s important to understand the fine print of the loan, including any hidden or stated fees, prepayment penalties, or other factors that may increase the cost of the loan over time.
You also may need to decide whether to choose a variable or fixed rate.
- Fixed-rate loans lock in the rate once you agree to the terms of the loan, so you’ll pay the same interest rate for the life of the loan, regardless of how interest rates rise or fall.
- Variable-rate loans have a rate that changes based on the market. A variable rate may start low but climb, sometimes up to a cap. Your bill will change, making it more difficult to budget the payments. And providers may have a different schedule for changing rates: some may be every month, others every quarter.
When deciding on a rate structure, considerations include the life of your loan (a longer loan term may mean more interest variation over time, including periods of higher interest), your budget, and what makes sense for your overall financial strategy.
Should Federal Loan Holders Refinance?
It’s important for federal borrowers to know that their required monthly payments have been paused and those loans are accruing 0% interest through 9/30/21.
The Department of Education folks like a different word: consolidate. In general, federal consolidation may lower your payments by extending the loan term (up to 30 years), but the amount of interest you pay will increase.
A direct consolidation loan consolidates multiple federal education loans into one federal loan, resulting in one monthly payment. It does not include any private student loans you have. The interest rate on a direct consolidation loan is the weighted average of your current federal student loan interest rates, rounded up to the nearest eighth of a percentage point. It’s a fixed rate.
Will a federal consolidation loan approved during the COVID-related “administrative forbearance” be placed in the paused-payment, zero-interest program? Yes.
Could I Get Loan Forgiveness If I Refinance?
This is a big question that doesn’t have a clear answer. President Joe Biden, as well as other politicians, support federal student loan forgiveness. Biden called on Congress to cancel $10,000 in federal student loan debt, but hasn’t said whether he’d expand that forgiveness to private student loan debt.
As of now, if you’re refinancing just private student loans, federal loan benefits don’t apply to your situation. If loan forgiveness did expand to private student loans, then refinancing may have allowed you to save money on interest in the meantime.
In other words: It can be a good idea for borrowers to look for windows of opportunity today instead of waiting for the future, when interest rates may rise.
The Takeaway: Is now a good time to refinance student loans?
If you have private student loans and can get a lower rate, it may make sense to do so. Understand any fees, prepayment penalties, and protections such as forbearance before you sign an agreement.
TDA Perks Program-endorsed SoFi is a leader in marketplace lending and the largest provider of student loan refinancing, with more than $19 billion in loans issued and more than 350,000 borrowers. SoFi has helped TDA members refinance over $14.7 million in student loans and offers TDA members a 0.125% rate discount through SoFi.com/TDA
SoFi Loan Products: SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 (https://www.nmlsconsumeraccess.org/). For additional product-specific legal and licensing information, see SoFi.com/legal.
SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS, PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF SEPTEMBER DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. FOR MORE INFORMATION, VISIT https://studentaid.gov/announcements-events/coronavirus#borrower-questions.
SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.