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Some student loan repayment rates are now very low (flat rates from Credible and Serious start at 2.5% or less and variable rates from Serious and LendKey start with 2%), but even in this low-rate environment, refi is not the right decision for all borrowers. Here’s what to consider before refinancing your student loans, and exactly how much refinancing can save the average borrower.
Why Refinance Student Loans?
The biggest reason for refinancing student loans is, of course, for savings. Mark Kantrowitz, student loan expert and book author How to Appeal for Additional College Financial Assistance says refinancing student loans can save money in two ways. “The first is if the refinancing lowers the interest rate, and the other is if the refinancing gives a shorter maturity,” says Kantrowitz. A shorter maturity gives a higher monthly payment, but reduces the total interest paid over the life of the loan. “The shorter the maturity, the lower the interest rate. This is because lenders are considering the likelihood that interest rates will start to rise over time, ”says Kantrowitz.
The lowest rates now are usually on floating rate loans (variable rates from Serious and LendKey start at less than 2%), but these loan rates are likely to rise, so it is usually better to take out loans with a fixed rate (fixed rates from Credible and Serious start at 2.5% or less), experts say. That is, unless you know you can pay off your loan quickly (student loans usually do not have prepayment penalties).
However, “be careful about refinancing federal loans into private student loans, as this will result in the loss of the best benefits of federal loans,” he adds. And Andrew Pentis, a certified student loan consultant and debt expert at StudentLoanHero, notes that: “Borrowers without financial security can refuse to refinance their federal loans even after the end of the moratorium. Ultimately, refinancing will permanently strip federal loans of their potentially useful guarantees, such as access to income-driven repayment plans, deferral and abstinence programs, and current and potential future loan forgiveness programs, ”says Pentis.
How Much Refinancing Can Save You?
With refinancing rates at historic lows, borrowers can save hundreds or even thousands of dollars over the course of the maturity. “The potential savings of each borrower is unique in terms of the details of their loan — remaining balance, loan term and interest rate — and depends on whether they can lower the interest rate or shorten the maturity of the refinanced loan,” says Pentis.
Kantrowitz says borrowers often mistakenly believe that cutting the interest rate in half will cut the monthly payment in half. “In fact, this reduces the payment by only 10-20%, depending on the maturity, since most of the payment goes towards principal, not interest,” says Kantrowitz.
So what might this look like in terms of real savings? The average borrower has approximately US $ 39,350 outstanding loans and the average interest rate is 5.8%. data from New America. If this borrower had a 10-year loan at this rate, but refinanced it for the same term with a loan at 3.8%, he would have saved approximately $ 4,600 over the term of the loan. Shortening the loan term can save even more. In the same scenario, if you shorten the loan term to 5 years, even if the interest rate was the same, it would bring a total savings of approximately $ 8,600, although the monthly payment would increase significantly. This is useful calculator can help you determine how much you can save. (Please note that flat rates from Credible and Serious start at 2.5% or less, and variable rates from Serious and LendKey starting from 2%)
How to determine if loan refinancing is right for you?
Pentis says student loan borrowers should consider refinancing in several different situations. “If their finances are stable and they want to save money on repayment, or if their financial institution is in a more precarious position and they want to lower their monthly payments,” he says.
Meanwhile, the financial attorney Leslie H. Tyne says refinancing can be a good move if you have private loans, great credit and want to save money with a new loan with a lower interest rate. “Refinancing for a new term is likely to result in a lower monthly payment if the rate is lower than what you are paying now, which frees up cash flow for other expenses,” Tyne says.
Kantrowitz also believes that nothing should prevent borrowers of private student loans, who are not eligible to suspend payments and waive interest, from refinancing their private student loans if they can qualify for a lower interest rate.