Is it Time to Refinance Student Loans?

With interest rates on education loans so low these days, borrowers with older loans may be tempted to refinance this debt.

Private lenders are offering refinancing rates as low as 2.99% for a fixed-rate loan and 1.99% for a variable-rate, according to Indeed, this might be a good time to refinance if it can save you money and simplify your finances by consolidating multiple loans into one.

If you have federal loans, don't rush into refinancing before understanding the valuable benefits you might be forfeiting. For example, federal student loan repayments are suspended and the interest waived through Dec. 31, 2020, during the COVID-19 outbreak. (Initially payments and interest were suspended through the end of September 2020.)

By refinancing, your old loans — federal and private — will be paid off and the debt rolled into a single private loan with a different interest rate and terms. Before taking this step, though, consider these questions:

What perks will you be giving up?  Your federal loans offer far more generous repayment options than private loans. Income-driven repayment plans can reduce monthly payments —  potentially dropping them to zero if your income is low enough. You also can request a temporary suspension of payments if you're having financial difficulties. And Uncle Sam offers loan forgiveness programs for teachers and other public service employees working for nonprofits or the government.

Don't refinance if you would be eligible for loan forgiveness. Also avoid refinancing if you're struggling to repay federal loans or if your job isn't secure — just in case you later need the government's flexible repayment options.

What new rate will you qualify for? If you don't need these federal perks, refinancing could be a money-saving opportunity. Say you have five years to go on repaying a $25,000 student loan at 7% interest. If you can refinance at 3.5%, you would save $2,414 in interest over the remaining five years, according to Kiplinger's student loan calculator. (If you choose to extend the term of the loan, your payments will be lower, but you'll pay more in interest.)

By refinancing, you can pick a loan with a fixed rate — one that stays the same throughout — or a variable rate that fluctuates over time. The rate you receive will be based on your income and  credit score — with the most creditworthy borrowers getting the most favorable rates. (Most lenders require a minimum credit score in the mid- to high-600s to refinance, according to NerdWallet.)

Please note: The contents of this publication provided by MissionSquare Retirement is general information regarding your retirement benefits. It is not intended to provide you with or substitute for specific legal, tax, or investment advice. You may want to consult with your legal, tax, or investment advisor to review your own personal situation. Some of the products, services, or funds detailed in this publication may not be available in your plan. This document may contain information obtained from outside sources and it may reference external websites. While we believe this information to be reliable, we cannot guarantee its complete accuracy. In addition, rules and laws can change frequently.

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