As rates drop, should you refinance your student loans?

As interest rates start to drop, you may be hearing more buzz about refinancing your student loans as a way to lower your bills.

“Essentially, what it means is you take the debt you owe and give it to another company. They’ll pay off the debt you have with the company you currently work with, and then you’ll pay off this new company,” explains Kristen Ahlenius, director of education and counseling at Your Money Line, a workplace finance company. wellness company.

For private borrowers who can qualify for a better interest rate, refinancing can lower your student loan payments with little or no downside. But refinancing student loans comes with a high opportunity cost if you have federal student loans — even if you can get a lower rate. You will transfer your debt from the Department of Education to a private lender and permanently lose federal borrower protections.

If you think about it student loan refinancinghere’s what you need to know based on your loan type—plus alternative ways to lower your payments and get student debt relief.

A borrower with only private student loans is a good candidate for refi, as long as they follow credit rules, says Stanley Tate, a student loan attorney. You usually need to have a stable source of income and a credit score of at least 600 to qualify for the lowest rates shown.

Consider refinancing now if you can save at least half a percentage point off your current interest rate, Tate says. Track rates even after you refinance – you can refinance multiple times if rates continue to drop.

“You should be aggressive in monitoring your rates until you get a really good rate,” says Tate. “We may not see 2% or 3% anytime soon, but 7.5% versus 8% is much better. It seems small, but over a 20-year loan, it adds up.”

Before deciding to refinance, research lenders and loan terms. A student loan refinancing calculator can help you compare your options. Pay attention to all aspects of the loans you’re considering—not just the interest rate.

“Rate is what most people think about, but a lot of times people don’t think, ‘What if I lose my job?’ Do I need a co-signer? What are the terms of this loan? When can it be default? What are the collection terms? What are the cases where the interest rate may go up or down in the future on this loan?'” says Jantz Hoffman, executive director of the Certified Student Loan Advisors Board of Standards, a nonprofit that trains financial planners to help their clients make student loans decisions. “And because they’re not uniform, those contracts and the language in those contracts matter.”

And if you’ve had a positive experience with your current private student loan — no issues with auto pay, the online portal, or customer service — refinancing with a new lender might not be worth it.

“Just think that sometimes that’s not always the experience,” Ahlenius says. “Unless there are significant cost savings, remember that experience is worth something too.”

Refinancing is risky if you have federal student loans.

When you refinance federal student loans, the lender you choose pays off your remaining federal debt and issues a new private student loan. It’s a permanent move: You can never convert your private refinance loan to a federal loan.

“This decision to forgo federal loans for private loans is one that is often regretted by the borrower,” says Hoffman. “Once that decision is made, there’s no more ‘Wow, I wish I had stayed.’ I could have gotten public service loan forgiveness. I lost my job and I need patience.”

This is true even if you can get a lower rate by refinancing: “Even though a private refi is cheaper in the long run for (borrowers), that opportunity cost of losing potential federal protections usually keeps people from moving in private space,” says Ahlenius. .

You also lose access to any future aid programs. For example, borrowers who refinanced their federal student loans before the pandemic did not benefit from the three-year interest-free payment break that began in March 2020.

• A high income, so IDR plans do not offer a lower payout than the standard 10-year plan.

• Steady employment so you can be sure you won’t lose your job in the future and need temporary relief.

• A good credit score so you can qualify for the lowest interest rates listed.

• You don’t work as a teacher, nurse, government employee, or other type of public servant, so you won’t qualify for 10 years Public service loan forgiveness.

• Do not work for any other loan forgiveness program, including IDR forgiveness.

Some borrowers with federal parent PLUS loans they may also be refi candidates because these loans have higher interest rates than those made directly to students, Tate says.

“If you are someone who is a few years away from retirement, you have a high income and you have a fairly small loan balance relative to your income, then refinancing may make sense because you may not be able to the final (forgiveness) before paying off the loan under the income-based terms,” says Tate.

• Flexible repayment plans. Income-based repayment plans limit monthly federal student loan bills, based on income and family size, to $0. These plans are not usually available for private loans.

• SAVE process tolerance. Thanks to SAVE processesborrowers enrolled in this federal loan repayment plan have an interest-free payment break until at least April. If you are not on SAVE, you can still receive this forbearance if you apply for the plan now.

• Delay or forbearance. Temporarily defer your federal student loan bills by asking your servicer a postponement or forbearance. Some private lenders also offer this option.

• Federal loan consolidation. You can consolidating several federal student loans into one loan and extend your repayment term up to 30 years, which can lower your monthly payment. Consolidation is different from refinancing because your loans stay in the federal system and you won’t lose any federal borrower protections.

• Set up automatic payment. Get a 0.25% interest rate deduction through setup automatic student loan payments through your service If you have private loans, ask your lender about auto pay benefits.