Should I refinance my student loans before payments resume?

Refinance now or later? That’s the question – for many federal student loan borrowers strategizing on how to save the most money.

About 43 million federal student loan borrowers have had their payments suspended and their existing balances at 0% interest for more than a year and a half. For borrowers on comfortable salaries who were able to continue making payments during this pandemic-era grace period, the last 20 months have been a unique opportunity to repay principal.

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However, with payments and interest repayments set to repay after January 31, 2022, high-income, high-debt borrowers can either weather the pandemic easing to the end or experience historically low interest rates. You have to decide before you act. Refinancing will inevitably begin to rise.

answer? Of course it depends. But most borrowers are probably safe to wait until early next year to refinance.

Travis Hornsby, founder and CEO of financial coaching firm Student Loan Planner, said his team received multiple messages a week from borrowers wondering if now was the right time to refinance. It states that

“Borrowers see the news and know that inflation is high, but they are confused that interest rates are still low and think they need to change quickly,” he said.

Jordan Frey, a 34-year-old orthopedic surgeon in Buffalo, New York, is one such borrower. He finished his medical training in July 2020 with about $500,000 in college debt and has been aggressively paying off loans as much as possible during his pandemic-era interest freeze. About a third of that debt is from private lenders, which he has already refinanced from 7% to his 2.75% interest rate loan. Now he’s considering doing the same for his 6.80% federal bonds. His only reservation is that the current federal bailout could be extended again (he’s done it four times already) and he’d lose that interest savings.

But he also worries that the time to refinance may be now or never.

“I know I can get very good interest rates,” he said, adding that most lenders quote 2% to 3%. “Many people are watching and wondering what to do as interest rates could rise.”

The truth is that some borrowers can benefit from refinancing now even if federal payments are still pending. However, the decision requires careful consideration and planning.

Federal Student Loan Refinancing Risks

First, for many people with federal student loans, refinancing is generally not a good idea. Even if interest rates on these loans return to their normal range (usually around 4% to 8%). The refinancing process involves taking out a new loan and using the funds to pay off the existing loan. Ideally, new loans come with better terms, such as lower interest rates, or the ability to reduce your monthly payments.

However, refinancing is only available through private lenders. That means federal loan borrowers will be forced to give up government-backed protections and benefits, such as income-driven repayment plans, forgiveness programs, and deferral or deferment options. For example, if you refinanced before March 2020, you are not eligible for the current suspension of payments and the 0% interest rate offered to federal borrowers.

Private lenders offer some protection, but are neither guaranteed nor standardized. This means that if borrowers refinance their federal student loans with private lenders and then run into financial difficulties, they may fall behind in payments and default.

Who Should Refinance Now?

However, borrowers like Frey are ideal candidates for refinancing, even if they have federal debt. Since he first took out his loan, his income and credit scores have improved, allowing him to take advantage of the lowest possible interest rates. Combined with an aggressive repayment strategy, it could help him knock out huge balances much sooner. It is highly unlikely that you will run out of money to pay.

The characteristics necessary for refinancing to be a smart idea – high salaries, stable jobs, large amounts of debt – make the process among doctors, dentists, lawyers, and people with MBA’s without qualifications or benefits. very general. More from the Forgiveness Program.

Most of these borrowers have some time to act, as the current low interest rates are likely to last into early next year. Hornsby recommends that borrowers wanting to refinance he prepare to apply in early January. Because the refinancing offer he is valid for 30 days, he can enjoy the entire federal grace period while securing a good rate.

However, certain borrowers may want to finalize new loans even sooner. A period of 20 years and she recommends that anyone who can qualify for a fixed interest rate in the range of less than 3% consider taking action before the federal suspension of payments expires. increase.

“If interest rates were to rise by even a quarter of a percentage point, it could cost more than a few decades more than an extra month of 0% interest rates,” Hornsby says. “Of course, every borrower should take into consideration their own goals.”

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How to choose the right refinancing lender

Even after deciding whether to refinance, you still have to make some important decisions, such as where to refinance. Student Loan Hero’s Certified Student Loan Counselor Andrew Pentis said that when scouring for offers, he can prioritize lenders that offer some sort of repayment protection in case they run into trouble paying. says.

You should also ask about lender-specific perks.

“If you see similar interest rates offered by different lenders, ask how each one stands out,” he says. “Ask yourself which additional perks are most attractive to you, and consider how you can break ties between multiple lenders competing for your business.”

Finally, Pentis recommends using this time to test the lender’s customer service before taking the plunge.

“If you’re hurt by federal loan service or skeptical of servicers in general, ask the customer relations team of the refinancing company you’re considering,” he says. Inquire about worst-case repayment scenarios. If they find themselves unhelpful as refinancing applicants, they may become even less involved after you become a customer.

“Keeping their feet on fire now is a good way to avoid becoming a shady lender later.”