Considering refinancing your student loans? What to know

Refinancing your student loan can save you a lot of money, but it might not make sense if you have a federal loan or can’t afford it. (iStock)

President Joe Biden has expressed support for forgiving $10,000 in student loans per borrower. In addition, he has called for making changes to the Public Service Loan Forgiveness Program. Under his plan, student loan borrowers would receive $10,000 in student loan forgiveness each year (up to five years) they participated in a national or community service program.

This proposed student debt cancellation only applies to student loan borrowers who hold federal student loans. If you have a private student loan, you might not receive any student loan forgiveness.

However, if you have a private student loan, student loan refinancing can help you save a lot of money. Since refinance rates are low right now, financial experts recommend it. With a lower interest rate, you can lower your monthly payment and pay off your loan faster.

To get an estimate of what your rate might be, use an online tool like Credible to compare student loan refinancing rates from multiple lenders at once without affecting your credit score.

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How student loan cancellation impacts federal loans 

Current student loan cancellation proposals target federal student loans. According to a report by MeasureOne released last March, 92.3% of student loans are federal loans. This means that, if a portion of student loans were canceled, the majority of student loan borrowers would have some or all of their debt wiped away. 

In addition, although the $10,000 student loan forgiveness has been undecided, federal borrowers can take advantage of programs to receive some forgiveness. For example, if you’re enrolled in an income-based repayment plan or Public Service Loan Forgiveness program, you can receive forgiveness after making a certain number of payments.

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How student loan cancellation impacts private loans

The impact of student loan cancellation on private student loans is uncertain. While some have speculated that private student loans may be forgiven in the future, there are no guarantees that’ll happen.

Unlike federal student loans, there are currently no private student loan forgiveness options.

If you’re considering refinancing your private loans now to save money, use an online tool like Credible to preview your personalized student loan refinancing rates from multiple lenders at once without affecting your score.

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When you should consider refinancing your student loans

If you have a private student loan, you should consider refinancing your student loans now if you can qualify for a lower rate and afford to repay the loan. Refinancing ahead of student loan debt cancellation can help you lock in rates while they are low. 

Waiting until student loan forgiveness takes place is risky because there’s no guarantee it will pass. Even if it does, it’s likely it won’t apply to private student loans.

The benefits of student loan refinancing include:

  • Lowering your monthly payments
  • Lowering your borrowing costs
  • Ability to speed up debt repayment

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The best student loan refinancing rates typically go to borrowers who have excellent credit scores. According to the FICO credit scoring model, a very good credit score is at least 740. To qualify for a new private loan, you’ll need to have a good credit score (670 or above).

Before you apply for a new loan, check your credit score and review your credit report for errors or incomplete information.

If you have a less-than-stellar credit score, you might not be able to secure a lower rate. However, applying with a cosigner who has great credit might help you get a better one.

To check your rates, use an online tool like Credible to get prequalified student loan refinancing rates without affecting your credit score.

In addition, if your private loan has a variable interest rate, refinancing your student loan gives you the ability to switch to a fixed-interest rate loan. That way, your payments wouldn’t increase with rising interest rates. Having a fixed monthly payment could be easier to budget for.

Since federal student loans are currently paused and have 0% interest rates, it doesn’t make sense to refinance them. Plus, you’d be missing out on potential student loan forgiveness and giving up benefits, such as income-driven repayment plans.

However, once the pause is lifted, it could make sense to refinance them if you don’t need those benefits and want a lower rate. Weigh the pros and cons before making that decision.

SHOULD YOU REFINANCE YOUR STUDENT LOANS?

Bottom line

If saving money is your goal, refinancing your student loans could be a good idea. Getting a lower rate could decrease your monthly payments, making it easier for you to save for other goals. Before you apply, though, weigh the pros and cons of taking out a new loan with other types of student loan repayment. 

To make sure you can afford the new loan, use an online student loan refinancing calculator to get an idea of what your new monthly payments might be.

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