Should You Rush to Refinance Your Student Loans?

Even with student loan cancellation announced and the interest-free forbearance extended again, student loan interest rates still matter — and nothing underlines that point better than the likelihood they’ll go higher.

Private student loan borrowers, whose payments aren’t suspended and won’t benefit from any federal cancellation, may be wondering if now is their last chance at a good deal on refinance.

The answer is likely yes.

Experts from Goldman Sachs anticipate up to seven federal funds target rate hikes this year, but rates can rise in anticipation as well. We've already experienced four rate hikes, and it's starting to show in student loan refinance rates.

Based on an analysis of 30 lenders' reported rates as of October 5, 2022, the average interest rates represent about a percentage point increase across the board from the averages in October 2022. The expectation for future fed rate increases means borrowers can expect that upward trend to continue.

But this doesn’t mean all student loan borrowers need to drop everything and refinance right now. Here are the borrowers who should rush to refinance and those who have reason to wait.

Rush: Private student loan borrowers with stable income

Those with private student loans don’t have the luxury of holding out for potential student loan cancellation. The best way to pay off these loans fast and at the biggest discount is by lowering your interest rate through refinance.

And the best time to refinance your private student loans is whenever you can get a better rate than the one you already have. You’ll need a stable income, a debt-to-income ratio of 50% or better and a credit score in at least the high 600’s to qualify. The better your credit profile, the lower rate you can expect.

Typically, refinancing for the shortest term available will also come with a lower rate. However, that could mean a higher monthly payment. On the other hand, a lower interest rate with a longer loan term could afford you a much lower payment, but may mean higher total repayment costs.

Consider this: A borrower with $29,000 in student loan debt at 7% interest with a 10-year term will see payments of $337 a month and will pay $11,405 in interest over the life of the loan.

This is how payments and total savings might look at a lower interest rate, along with options to save even more with a shorter term, or to reduce the payment further by extending the repayment term.

To save even more in the long run, consider shortening your term. If you choose a five-year term with a 6% interest rate, for example, you would save about $6,766 over the life of your loan and would pay off your debt twice as fast. But your monthly payments would be $224 higher.

If the lowest monthly payment is more important to you — even if it costs more over time — consider extending your term. Choosing a 15-year term at 6% interest would bring payments of about $245 per month, but would cost $3,645 more overall.

Before deciding, check your rate offers with several lenders. You may also be able to improve your rate offer by adding a highly qualified co-signer. Make sure to prequalify with lenders that will show your rate and term offer with a soft credit check, so your score isn’t affected.

Probably wait: Private student loan borrowers struggling to make payments

If you can’t keep up with your current student loan payments, refinance may not be an option for you.

Lenders consider your credit profile, which can include your student loan payment history. They also evaluate the factors that are likely making it difficult to keep up with your current payments, like income and total debt load.

It’s best to take time to improve your credit profile before applying to refinance. You might also qualify with a co-signer, but ensure that person understands your financial situation and knows they will be responsible for the loan if you can’t pay.

Wait: Federal student loan borrowers

Refinancing is only available through private companies. That means if you refinance your federal student loans, they’ll become private student loans and you will lose government safety nets. Brian Walsh, a certified financial planner, CFP, and senior manager of financial planning at student loan lender, SoFi, urges federal borrowers to consider what’s at stake when chasing a lower interest rate.

Federal borrowers who may need payment protection through programs like income-driven repayment and those who qualify for the Public Service Loan Forgiveness program should not rush to refinance.

But even borrowers who won’t use those programs still have reason to wait. All federal student loans are in an interest-free forbearance through summer 2023 at the latest. Furthermore, President Biden announced up to $20,000 in cancellation for certain borrowers — but the program is on pause while it battles legal challenges.