The COVID-19 pandemic has hit our economy pretty hard, leading to widespread job loss and plummeting investments. But one silver lining is that the Federal Reserve has slashed its interest rates, and lenders have followed suit. That makes this an affordable time to borrow money and refinance existing loans.
College students, graduates, and parents may be wondering if they should refinance their student loans to take advantage of these lower rates. There is no clear-cut answer, because everyone’s situation is different, but it’s definitely an option you should consider. Here are a few signs that now is a good time to refinance your student loans.
1. You’re worried about your ability to keep up with your payments
Refinancing your student loans can help you secure a more affordable monthly payment, particularly if you extend your loan term, and that can ease the financial burden on you in the short term. But you might have other options for making ends meet right now that are also worth exploring.
The federal government has placed all federal student loans on automatic forbearance and suspended interest and collection activities until Sept. 30 in response to the COVID-19 pandemic. If you have one of these loans, you don’t have to worry about making payments or your balance growing any further until then.
Some private student loans are also offering forbearance, though interest will continue to accrue, for borrowers financially affected by COVID-19. These are options if you only require short-term assistance and you don’t want to go through the trouble of refinancing your loans.
2. You want to pay less overall
Even if you’re not having any trouble keeping up with your payments, refinancing can still save you money over the long term. Interest rates are low right now, so the odds are good that refinancing would result in you paying less interest over the lifetime of your loan than sticking with your current repayment terms.
Say you had a $20,000 student loan with a 10-year repayment term and a 9% APR that you took out two years ago. If you refinance that loan with a new student loan that has a 10-year repayment period and a 6% APR, you’d save $1,483 in interest overall, even though you’re extending the length of your loan by another two years.
If you choose to refinance, you can only do so with a private student loan. These loans may offer lower interest rates, especially to borrowers with excellent credit, but they also lack the flexible repayment terms and forbearance options of federal student loans. Once you give those up, there’s no going back, so you have to weigh that as well when deciding whether to refinance federal student loans.
This isn’t a concern if you already have private student loans. You probably won’t lose much by refinancing in that case. But if you’ve lost your income due to COVID-19 or you have poor credit, you might not find many lenders willing to work with you because there’s a greater risk you could default on your loan.
3. You have an inflexible private student loan
With many people out of work indefinitely and the economy struggling right now, it’s possible that some student loan borrowers could have a tough time even after the immediate crisis passes. The COVID-19 hardship assistance programs that student loan companies are offering right now will likely go away at some point, and that could put you under a lot of pressure.
Now more than ever, it’s important to have a lender that gives you some flexibility in terms of how you pay back what you borrow, whether that’s income-driven repayment or opportunities for hardship deferment or forbearance, even when there’s not a global pandemic. If you’re not happy with the terms your student loan provider offers you, now is a good time to switch. You might be able to save yourself some money in the process as well.
How to refinance your student loans
Before you refinance, get quotes from multiple student loan companies to see which offers the most affordable rates and the most flexible repayment terms. Compare your new monthly payments and overall costs to how much you’re paying now to decide if it’s worth it. It takes a little time, but skipping this step could cause you to miss out on an even better deal.
When you find the company you’d like to work with, you can fill out an application on the company’s website. You’ll need to know what your outstanding balance is, which you can find on your current student loan servicer’s website, and you’ll have to provide information on your income. Your loan servicer will also run a credit check to help determine whether it wants to lend to you and what interest rate to charge.
Refinancing might not make sense for everyone, but the low interest rates available right now are limited-time offers, so it makes sense to at least consider refinancing your student loans. Doing so could save you quite a bit of money and ease the financial strain you’re under as you try to get your life back to normal.