Not too long ago, there were high hopes that millions of federal student loan borrowers would get up to $20,000 in debt canceled through the Biden administration’s forgiveness plan. Today, that plan looks in serious jeopardy because of a series of legal challenges, leaving borrowers to consider alternative strategies — including refinancing their loans.
This might be a good time to look into refinancing thanks to a recent dip in interest rates.
Average rates to refinance a student loan to a 10-year fixed-rate loan were 7.13% for the week ending April 4, MarketWatch reported, citing data from personal finance company Credible. That was down from 7.32% the week prior.
Five-year variable-rate loans fell to 5.01% from 6.70% the week before. For those with credit scores of 720 and above, rates fell to 7.01% for 10-year fixed loans and 5.01% for 5-year variable loans.
You can expect a lot of borrowers to investigate refinancing should the loan forgiveness plan get struck down by the U.S. Supreme Court, which is currently reviewing lawsuits brought against the plan. Before you consider refinancing your own student loan, it helps to be aware of the pros and cons.
Because federal student loans are made through the Department of Education, you can’t refinance them through the government. But there’s nothing stopping you from refinancing them through a private lender. The merits of doing so depend on your specific situation. For many borrowers, refinancing is simply not a good idea, according to Thomas Gokey, co-founder of the Debt Collective, a union for debtors.
Many people who refinance “actually end up paying thousands of dollars more in interest over the long run,” Gokey wrote in a column for Business Insider.
He used the example of someone with $100,000 in federal graduate student loans at the current 6.54% interest rate. Under this scenario, the borrower would make monthly payments of $1,138 on the standard 10-year plan and end up paying $36,502 in interest over the lifetime of the loan. But if they refinanced for a lower monthly payment of $660 at a lower interest rate of 5% over a 20-year repayment plan, it would cost them $58,390 in interest over the long term.
Gokey also warns against getting enticed into a variable interest rate — something you won’t find with federal student loans, which only offer fixed rates. With variable rates, you might start out with a low rate only to watch it skyrocket in later years, costing you more money over the life of the loan.
Maybe the biggest drawback of refinancing your federal student loan is that you give up the protections you get from government-backed loans. One major risk is that you will lose out on the federal student loan payment pause that went into effect during the early days of the COVID-19 pandemic and is still in place today. There’s speculation that the pause might be extended even longer if the Supreme Court rules against the Biden loan forgiveness plan.
Another thing to consider is your credit score. If you have poor credit, you’ll probably get stuck with a high interest rate if you refinance. With federal loans, your rate is already locked in.
While Gokey cautions that for most borrowers, the risks of refinancing are “almost always too high,” there might be cases where refinancing makes sense.
For example, if have good credit and can lock in a lower interest rate for the full life of the loan — without having to pay any other fees — then refinancing is a smart move.
Also, if you have multiple student loans (including your federal loan), then consolidating them into a single refinanced loan gives you the convenience of making one monthly payment instead of several. If you also save money through better loan terms, that’s an added bonus.
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