Interest rates are low, so it is the perfect time to refinance, right? Not necessarily!
Whether a “refi” makes financial sense will depend on several factors related to your personal portfolio of loans. Here are a few tips to consider before making your decision.
Consider any benefits you stand to lose by refinancing with a private lender.
Federal student loans include several benefits that private lenders may not offer such as:
- More flexible repayment terms such as income-driven repayment plans or pauses for borrowers who have difficulty repaying;
- Options for loan forgiveness or cancelation;
- Discharge after a borrower’s death or total and permanent disability; and
- Special benefits put into place due to COVID-19, including a six-month freeze on interest accumulation and required payments.
Compare your current interest rate(s) to the potential rate(s) on your refinanced loans.
Look at your existing loans to determine the interest rate for each loan and whether the rates are fixed or variable. A fixed rate is set for the life of the loan, whereas a variable rate is set to change (up or down) at set intervals depending on the movement of an underlying interest rate.
A varying interest rate means the amount of your payment will vary, up or down, in tandem with the changes in interest rate.
Sometimes “refi” advertisements showcase the lowest possible rate although the rate may not be available to the average borrower. Read the fine print and beware of “teaser” terms. These are usually temporary, more attractive terms that are subject to change as the lender deems necessary.
Determine how much time you have left to repay your current student loans and how much time a refinanced loan will add to your repayment timeline.
Refinancing is usually more beneficial for borrowers who have not made much progress toward repaying their existing student loans because refinancing creates a new loan that resets your repayment clock to “start”. A new, lowered payment will provide some relief, but a new repayment clock could mean repaying over a longer time. Be careful because taking the longest time to repay at the lowest monthly payment leads to repaying more overall.
Look at each new lender’s fee structure to find out how much refinancing may cost you.
Your new interest rate is one of many numbers you should determine before refinancing student loans. Other charges to look for include:
- An application fee that is assessed when you apply for refinancing;
- An origination fee that is charged when your refinanced loan has been processed; and
- Late payment fees or penalties that may be applied if you make a late payment or miss payment(s) altogether.
Refinancing can produce cost-savings for some borrowers but not for all. If you think refinancing may be beneficial to you, take inventory of your loans and their terms first. Then, shop around for the lender whose refinancing terms best suit your personal finances and financial goals. At CCCSMD, our student loan Financial Advocates are certified by the National Foundation for Credit Counseling (NFCC) and they are up-to-date on recent student loan trends and options. Call us today at (800) 642-2227 to schedule an appointment.
Contributed by Dr. Tisa Silver Canady, Author and Managing Director of Silver Canady & Associates, LLC