Refinancing your student loans can be tempting, especially with the latest news of federal rates getting cut. Now may be the best time to refinance student loans. This is due to interest rates on student loan refinancing staying lower than they have been in a while, some as low as 2.27% for some candidates. Refinancing can help you lower your monthly payment, lower the amount of interest paid, or even both. This can be extremely useful if you are burdened by high-interest loans. However, refinancing is not best for everyone and it's worth contemplating your individual situation just in case.
When you refinance student loans, you lose federal benefits
If you have federal student loans, you have a lot of built-in benefits that can help you out. Those who struggle to make federal loan payments have various ways to get help. If needed, you can apply for forbearance, which will pause your payments, although interest continues to build. Federal loans are also available for any forgiveness programs that exist.
On top of that, these loans also have various repayment options to help you as much as possible, including income driven repayment. In an income driven repayment plan, you only have to pay a percent of your income, no higher than 20%, until you pay off your loan plus interest. If you pay that percent of income for up to 25 years and never repay the loan, the leftover amount is forgiven.
Make sure you have the credit and ability to repay
Having a great credit score will go a long way towards getting you the lowest rate possible. If you have great credit and an income that will allow you to pay back the refinance, you should be able to get a better rate. Each company has its own system for determining interest rates, so you may have different rates with different companies. You can also get discounts for applying auto-pay and taking a variable rate loan. Just beware of the negative effects of a variable rate loan before deciding to do so. Also, check if the refinance company has any fees that can raise your initial costs.
If everything looks good and you are comfortable losing your federal protections, refinancing may be a good option for you. Make sure you shop around to get the best rate and find the company that fits your situation best. There's no rush to refinance either. If you're not sure if you're ready, you can always wait.
Alternatives to Student Loan Refinancing
You could consolidate all your federal student loans into one loan. This will bring all your loans under a single loan with one servicer and keep federal protections. Consolidating your loans can make it easier to track and manage your loans, but you will keep a similar, blended interest rate to what you had.
You could forgo the loans altogether and refinance with an income share agreement (ISA). An ISA allows you to pay a small percent of your income for a set amount of time. The payments will vary as income changes, keeping payments affordable. Defynance currently offers student loan refinancing using income share agreements.
