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The majority of student loan borrowers — about 92% — hold federal loans issued by the government. This means that private borrowers for student loans only make up a small part of the overall student debt pie.
What type of borrower you are is important because it makes a big difference when deciding if now is a good time to refinance your student loan.
Both federal and private student borrowers can refinance their loans. When you refinance your loans, you’re swapping your current student loans for an entirely new loan through a private lender. Refinancing gives you the opportunity to consolidate your multiple monthly student loan payments into one while ideally achieving a lower interest rate and a new loan term that best suits your financial situation.
With interest rates currently at record lows, today could be an ideal time for private student loan borrowers to consider refinancing. On the other hand, borrowers of federal loans whose payments and interest are frozen until at least September 2021 probably shouldn’t.
Here’s what you need to know about student loan refinance in today’s market.
Federal Student Loan Borrowers: Don’t Refinance Now
If you are a federal student loan borrower, do not refinance at this time.
The suspension of federal student loan payments and interest, in effect since the passage of the CARES Act in March 2020, means the interest rate for federal borrowers has been set to zero. Generally, you decide to refinance to get a lower interest rate, so it wouldn’t make sense as 0% could already be the lowest.
If you can afford it, you can pay off your principal debt faster by making payments today at a 0% interest rate. But if you withhold payments, 0% interest means your balance won’t grow over time.
When student loan payments eventually resume, federal student loan borrowers should still exercise caution before deciding to refinance. Refinancing your federal student loans through a private lender (since you cannot refinance through the government) will result in you losing access to all of the federal protections you used to have.
These protections include forbearance and deferral options, income-based repayment plans, and student loan forgiveness programs. If President Biden ends up canceling any student loan debt, you would no longer be eligible if you refinanced your loans through a private lender.
Student Loan Borrowers: Consider Refinancing Now
Consider refinancing if you’re a private student borrower paying an excessively high interest rate. Right now, federal loan rates are the lowest in over a decade, meaning many private lenders have followed suit and lowered their interest rates as well.
But low interest rates won’t last forever: although private lenders set their own rates, they are influenced by the Fed’s policy rate. As Covid restrictions ease and the economy improves over time, the Fed will hike rates again and refinancing may not be as cheap.
As such, now is an ideal time for personal student loan borrowers to consider refinancing and take advantage of low interest rates before they rise again. If your credit score is better than when you last applied for a personal student loan, you’re in an even better position to qualify for a low interest rate.
The APR on refinanced student loans is currently between 2.59% and 7.63% fixed and variable between 1.99% and 6.86%. If you’re looking for a private lender to refinance, use their pre-qualification tools before applying to see what interest rates you’re eligible for without hurting your credit.
You can also use credit marketplaces like Credible to compare lenders. When interest rates are historically low, you should choose a lender that offers a fixed APR so you can lock in the low interest rate and know it won’t change over the life of your loan.
Select analyzed and compared private student loan financing from national banks, credit unions and online lenders to rank your best borrower options. We’ve ranked our top student loan refinance companies, and they all offer low, fixed refinance rates:
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Editorial note: Any opinion, analysis, review, or recommendation expressed in this article is solely that of Select’s editors and has not been reviewed, approved, or otherwise endorsed by any third party.