Student loan debt is now at an all-time high, according to Forbes. Collectively, the 45 million Americans with student debt owe $1.7 trillion (yes, trillion, with a “t!”). Student debt has surpassed credit card and car debt, making it the second greatest source of consumer debt– just behind mortgages.
If you’re one of the 45 million who owe money for your education, you may be wondering if refinancing your student loans is advantageous.
There’s no clear-cut answer on this one. Read on to learn when we’d advise refinancing and when we’d suggest you stay the course.
When not to refinance
Federal Student Loans
If you have federal student loans, we would not recommend refinancing. Refinancing with a private lender would mean that the new lender, usually a bank, would pay off your loan to the government. Then you’d begin making payments to the bank rather than the government. Sure, the interest rate a bank offers might look appealing, but you would be surrendering your opportunity to benefit from programs the government offers to Americans with federal student loans.
The CARES Act now offers automatic forbearance, and there’s an opportunity for income-based payment plans. Plus, though nothing has passed yet, Congress has discussed the possibility of addressing the massive student loan debt. Don’t refinance and forfeit the possibility of loan relief.
If you are an educator or if you’re employed by a public service organization or nonprofit, keep your federal loans. Refinancing would mean giving up your ability to qualify for assistance through the Public Service Loan Forgiveness Program.
Credit Score
Additionally, if you have private loans but a low credit score, do not refinance. Ride it out with your current lender. Most lenders require a minimum credit score of 650 to 680. And remember – the process could lower your score slightly due to the lender checking your credit. If you are approved, know that lenders typically offer the lowest interest rates to applicants with the highest credit scores.
Timing
Similarly, if you’re in the final stretch of paying off your loans, stay the course. Or, if you anticipate a significant change in your monthly cash flow, like a potential job loss, do not refinance. If you foresee difficulty in making the payments, now is not the time to make a change.
When to Consider Refinancing
If your loan is with a private entity like a bank, we’d advise you differently. If you’re eligible for a lower interest rate now and if your finances are stable, refinancing could lower your monthly payment. Lowering your payment would also mean paying off the loan sooner. Before you begin “shopping” for a refinance option, pay attention to the following.
Rates change rapidly, so once you find a lender, go ahead and follow through. Once you are deemed eligible for a low rate, lock it in.
There will be a credit check once you do find the lender you’d like to use. The credit check could dock your credit score up to five points, so again – find a lender you like and go for it. Don’t pursue multiple lenders who will run checks simultaneously.
Refinancing provides the opportunity to adjust your cosigner settings. You can either release a cosigner or add one. So if a parent was a cosigner when you received your loan initially back in college, you can release them now if your financial standing is solid enough for the lender to agree. Or, if you want to add a cosigner who meets the lending requirements, you can do that in the refinancing process.
The Bottom Line
Refinancing can be a great way to reduce debt faster – or at least reduce your monthly payment. But it’s not a good option for everyone, and we’d never recommend it for someone who may be eligible for government loan assistance. Plus, there are tax implications to consider. Give us a call so we can discuss your situation and decide together if now is the right time for you to refinance your student loans.