Some student loan refi rates start below 2%. Here’s how much that could save you

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Student loan refi rates are very low right now – check out the lowest rates you could qualify for here – but even in this low interest rate environment, a refi is not the answer for all borrowers. Here’s what to keep in mind when thinking about refinancing your student loan and how much a refi could save the average borrower.

Why Refinance Your Student Loans?

Of course, the main reason for refinancing your student loan is to save money. Mark Kantrowitz, student loan expert and author of How to Appeal for More College Financial Aid, says there are two ways that student loan refinancing can save you money. “On the one hand, if a refinancing lowers the interest rate, on the other hand, if a refinancing leads to a shorter term,” says Kantrowitz. A shorter term results in a higher monthly payment, but reduces the total interest over the life of the loan. “The shorter the repayment period, the lower the interest. Because the lenders take into account the likelihood that interest rates will rise over time, ”says Kantrowitz.

The lowest interest rates currently apply as a rule to floating-rate loans (see Interest rates from serious and SoFi and Loan key here), but those floating rate loans will most likely go up, so a low-rate, fixed rate loan may be better, experts say. However, if you know you can pay off the loan quickly, an adjustable rate loan with a very low starting rate may make sense for you.

However, be careful about refinancing federal loans into private student loans. For one, those with federal loans are likely currently enjoying the federal government’s interest-free student loan payment moratorium that runs through January 2022. B. Access to income-based repayment plans, deferral and deferral programs, and current and potential future loan forgiveness programs, ”said Andrew Pentis, Certified Student Loan Advisor and Debt Expert at StudentLoanHero.

How much could you save by refinancing?

With some refinancing rates at all-time lows, borrowers could save hundreds or even thousands of dollars over the life of their repayment. “Each borrower’s savings potential depends on their credit details – the balance, the loan term and the interest rate, and depends on whether they could lower their interest rate or shorten their repayment period on the refinanced loan,” says Pentis.

Kantrowitz says borrowers often mistakenly believe that halving the interest rate will cut the monthly payment in half. “It actually only reduces the payment by 10 to 20%, depending on the repayment period, since most of the payment goes towards the repayment and not the interest,” says Kantrowitz.

How could that look in terms of actual savings? The average borrower has approximately $ 39,350 in outstanding loans and an average interest rate of 5.8%, according to New America. Had this borrower a 10 year loan at this rate but refinanced for the same term with a 3.8% loan, he would save approximately $ 4,600 over the life of the loan. You can save even more by shortening the loan period. In the same scenario, shortening the loan term to 5 years, even with the same interest rate, would result in a total saving of around $ 8,600, although the monthly payment would increase significantly. This helpful calculator can help you figure out how much you can save.

How can you tell if your loan refinance is right for you?

Penis says student loan borrowers should consider refinancing in a variety of situations. “When your finances are solid and you want to save money on repayments, or when your financial situation is more uncertain and you want to cut your monthly payments,” he says.

Meanwhile, finance attorney Leslie H. Tayne says a refinance can be a good move if you have personal loans, excellent credit, and want to save some money by getting a new loan at a lower interest rate. “Refinancing to a new term will likely result in a lower monthly payment if the rate is lower than what you are paying now, freeing up cash flow for other expenses,” says Tayne.

Kantrowitz also believes that nothing should deter borrowers from private student loans that are not eligible for the payment break and interest waiver from refinancing their private student loan if they receive a lower interest rate.

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