Due to financial consequences of COVID-19 — and the broader impact on our economy — now is an excellent time to consider refinancing most loans you have. This can include mortgage debt you have that may be converted to a new loan with a lower interest rate, as well as auto loans, personal loans, and more. Refinancing student loans can also make sense if you’re willing to transition student loans you currently have into a new loan with a private lender. Make sure to take time to compare rates to see how you could save money on interest, potentially pay down student loans faster, or even both if you took the steps to refinance.
Get Started and Compare Rates NowStill, it’s important to keep a close eye on policies and changes from the federal government that have already taken place, as well as changes that might come to fruition in the next weeks or months. Currently, all federal student loans are locked in at a 0% APR and payments are suspended during that time. This change started on March 13, 2020 and lasts for 60 days, so borrowers with federal loans can skip payments and avoid interest charges until the middle of May 2020. It’s hard to say what will happen after that, but it’s smart to start figuring out your next steps and determining if student loan refinancing makes sense for your situation. Note that, in addition to lower interest rates than you can get with federal student loans, many private student lenders offer signup bonuses as well. With the help of a lower rate and an initial bonus, you could end up far “ahead” by refinancing in a financial sense. Still, there are definitely some negatives to consider when it comes to refinancing your student loans, and we’ll go over those disadvantages below.
Should You Refinance Now?Do you have student loan debt at a higher APR than you want to pay?
- If no: You shouldn’t refinance.
- If yes: Go to next question.
- If no: You shouldn’t refinance.
- If yes: Go to next question.
- If no: You can consider refinancing
- If yes: Go to next question
- If no: You shouldn’t refinance
- If yes: Consider refinancing your loans.
Reasons to RefinanceThere are many reasons student borrowers ultimately refinance their student loans, although they can vary from person to person. Here are the main situations where it can make sense to refinance along with the benefits you can expect to receive:
- Secure a lower monthly payment on your student loans. You may want to consider refinancing your student loans if your ultimate goal is reducing your monthly payment so it fits in better with your budget and your goals. A lower interest rate could help you lower your payment each month, but so could extending your repayment timeline.
- Save money on interest over the long haul. If you plan to refinance your loans into a similar repayment timeline with a lower APR, you will definitely save money on interest over the life of your loan.
- Change up your repayment timeline. Most private lenders let you refinance your student loans into a new loan product that lasts 5 to 20 years. If you want to expedite your loan repayment or extend your repayment timeline, private lenders offer that option.
- Pay down debt faster. Also, keep in mind that reducing your interest rate or repayment timeline can help you get out of student loan debt considerably faster. If you’re someone who wants to get out of debt as soon as you can, this is one of the best reasons to refinance with a private lender.
Why You Might Not Want to Refinance Right NowWhile the reasons to refinance above are good ones, there are plenty of reasons you may want to pause on your refinancing plans. Here are the most common:
- You want to wait and see if the federal government will offer 0% APR or forbearance beyond May 2020 due to COVID-19. The federal government has only extended forbearance through the middle of May right now, but they might lengthen the timeline of this benefit if you wait it out. Since this perk only applies to federal student loans, you would likely want to keep those loans at 0% APR for as long as the federal government allows.
- You may want to take advantage of income-driven repayment plans. Income-driven repayment plans like Pay As You Earn (PAYE) and Income-Based Repayment let you pay a percentage of your discretionary income each month then have your loans forgiven after 20 to 25 years. These plans only apply to federal student loans, so you shouldn’t refinance with a private lender if you are hoping to sign up.
- You’re worried you won’t be able to keep up with your student loan payments due to your job or economic conditions. Federal student loans come with deferment and forbearance that can buy you time if you’re struggling to make the payments on your student loans. With that in mind, you may not want to give up these protections if you’re unsure about your future and how your finances might be.
- Your credit score is low and you don’t have a cosigner. Finally, you should probably stick with federal student loans if your credit score is poor and you don’t have a cosigner. Federal student loans come with fairly low rates and most don’t require a credit check, so they’re a great deal if your credit is imperfect.
Where do I find companies that transfer a parent loan into the child’s name and does it change it from being the worst loan possible??
Probably not Wendy. Some will allow you to be removed if you’re a cosigner, but if it’s in your name only the only way is for the child to refinance the loan into his or her own name.
hey jeff, thanks for sharing the best information about the loans because a very student doesn’t know the student loan process and they are in problems.
I think the “paying your debt down as soon as possible” makes sense for most. Only because I think there’s a tremendous amount of freedom and mental and emotional relief with paying off one’s debts. And in today’s society where a lot of millennial college grads have six figure debts accrued as they start their careers; I’d say taking off that ball and chain is pretty high up on the priorities list!!
I wish more students knew about this. Not enough people know about their options, and with tuition rising, students are spending more and more money that they’ll be paying back for decades.
Thanks Jeff for sharing the useful information. There is a great deal of confusion regarding the student loans. With all the inputs you have offered, it becomes somewhat easy to understand the intricacies involving the loans.
Thanks Katherine, that’s exactly what I’m trying to do here!
I think the best way to get rid of debt is to understand its cons. First of all, one should take all course of action to avoid debt and if nothing works out take loan but plan it. I mean how would you repay the debt.