As Interest Rates Dip, Is Now a Good Time to Refinance Student Loans?

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For the first time in years, Americans are living in a world of falling interest rates.

With the Federal Reserve cutting its benchmark interest rate in September by half of a percentage point — and more rate cuts likely in the pipeline — borrowers are eager to find better deals on their debts.

For student borrowers, in particular, the new rate environment could bring student loan refinancing back into fashion. When borrowers refinance their student debt, they’re typically looking for better terms, either through a lower interest rate, smaller monthly payment or both.

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Student loan refinance rates currently start around 4.7% for fixed-rate loans. Several lenders are advertising rates that are slightly lower than they were at this time last year.

Overall, though, refinance rates are still well above where they were a few years ago. So is now a good time to refi? The decision ultimately depends on your loan types, current interest rate, credit score, and how much time you have left on your loan.

Who should refinance their student loans right now?

If you already have private student loans, and the current rates are lower than what you’re paying, then now could be a great time to refinance, says Brittany Brinckerhoff, a certified financial planner at Hilltop Wealth Advisors in Chapel Hill, North Carolina.

Brinckerhoff says that borrowers should also think about how much time they have left on their loan when weighing whether it makes sense to refinance. “If you’ve got 20 years left on your loan and you can save money on it now [by refinancing], that's gonna have a much bigger impact than refinancing if you're going to pay them off next year,” she says.

As always, you have to remember that the lowest rates quoted by lenders may not be the rate you actually qualify for, depending on your finances and repayment terms. Still, borrowers may be surprised by how much they’ve improved from a lender’s point of view since they took out their loans when they were 18 or 22, says Michael Dean, a certified student loan professional with Student Loan Planner.

“They didn’t have the credit score of a 28- or 30-year-old professional back then, so that same individual who only qualified for, say, 12% could qualify for a much lower rate now,” he says.

Does the math change if you have federal student loans?

While there are few downsides to refinancing if you have private student debt, borrowers with federal loans should think long and hard before making the move. If they refinance, they lose eligibility for valuable federal protections — most notably, income-driven repayment, forgiveness programs and discharges due to circumstances like total permanent disability.

Even if you’re earning a comfortable salary and don’t expect to qualify for loan forgiveness, you still want to consider the pros and cons. Snagging a lower interest rate would be nice, but are you financially secure enough to weather a job loss? Or would you be upset if you missed out on new loan forgiveness policies the government may push forward down the line?

Refinancing your federal debt would mean missing out on these benefits now and in the future. “You can’t really put it back in the federal system. Once it’s out, it’s out,” Dean says.

That said, refinancing doesn’t have to be an all-or-nothing decision if you have several student loans to pay off. Brinckerhoff has a client who refinanced a portion of their federal student debt with a private lender but kept some federal loans. That allowed the client to benefit from a lower interest rate while still holding out hope for a future government program that could offset the cost of the remaining federal debt.

Should you wait for interest rates to fall further before you refinance?

Many onlookers are predicting the Fed will cut rates twice more this year, in November and December. Some experts even think there’s a case for another larger-than-normal cut of 50 basis points, meaning student loan refinance rates are likely to keep getting better.

“I would probably not rush to go through the refinancing process right now,” Brinckerhoff says. “If you have a decent rate now, it probably wouldn't hurt you to wait another three or six months and see where things have gotten at that point.”

But the decision to refinance now versus later definitely depends on what rate you currently have. “If someone's locked into upper single-digit interest rates, it might make sense for them to refinance now,” she says.

And even if future rate cuts bring down rates dramatically, there’s actually minimal risk to refinancing again if you can get more favorable terms. Unlike with mortgage refinance, there’s usually no cost associated with refinancing student loans. Most lenders don’t charge any application or origination fees, or penalize you if you make extra payments to pay off your loan fast.

“The biggest risk is taking hits to your credit,” Brinckerhoff says. “If you've got good credit, one or two hard credit checks in a short time period are not going to be a huge deal, but if you don't have excellent credit to begin with, trying to refinance too much would hurt your credit, which would hurt the loan rate that you'd even be able to get.”

Another important factor is whether you’re planning to use your credit for a major expense in the near future. “I would be reticent to get a hard credit check if you’re also looking to buy a car or a house in the next two, three or six months,” Dean says.

If you’re comfortable with your current credit score and don’t mind a short-term hit, the long-term benefits of securing a lower interest rate generally outweigh the impact of a hard credit check.

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