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Why financial experts are urging student loan borrowers to refinance

Finance

Refinancing your student loans can help you save thousands of dollars in interest and pay them down faster, allowing you to save money for an emergency or other purposes. Interest rates are extremely low right now since the Federal Reserve kept short-term interest rates at nearly zero to try to stimulate the economy amid the coronavirus pandemic.

Credible can reveal what refinance rates you qualify for. You can compare student loan refinancing rates from up to 10 lenders without affecting your credit.

Should you refinance student loans right now? People who have larger amounts of student loans could benefit by refinancing them into lower rates, which can help pay off the debt sooner. But is now the right time to act — or should you wait? Financial experts are encouraging borrowers to refinance private student loans now because interest rates have been incredibly low and are not likely to rise in 2021.

“For borrowers with excellent credit and a stable income, they can potentially save thousands by refinancing their loans,” said Leslie Tayne, a Melville, N.Y. attorney specializing in debt relief.

Pros When you refinance, you are replacing your current loans with a new one. There are some benefits to this move, including:

  1. Getting a lower interest rate
  2. Lowering monthly payments
  3. Consolidating several loans
  4. Cutting the life of your loan
1. Getting a lower interest rate If you refinance now — when interest rates are low — you have a better chance of replacing your old loan with a new one attached to a lower interest rate. That way, you have a chance to save more money over time. Right now is a great time for those with private student loans to refinance before interest rates rise. (Just note: If you refinance federal student loans, then you could lose some of the perks and benefits that come with them, so make sure you do your research before making final decisions).

You can compare student loan refinancing rates from multiple lenders at once via an online tool like ​Credible without affecting your credit score.

2. Lowering monthly payments For borrowers who are financially stable, receive a steady income from their current job, and are not anticipating any need for affordable repayment plans or public student loan forgiveness, refinancing federally guaranteed loans can be a consideration. Again, just remember you could lose federal loan protections and perks.

However, if you have private student loans, then now is a good time to refinance.

“Refinancing your student loans can open opportunities to save money with lower monthly payments and reduced interest,” said Bruce McClary, spokesperson for the National Foundation for Credit Counseling, a Washington, D.C.-based non-profit organization.

If you have private loans, check to see if the current student loan refinancing rate is lower than yours. If it is, then use Credible to get actual personalized rates based on your credit history.

3. Consolidating several loans People who have private student loans should consider refinancing because of the low interest rates and the opportunity to consolidate several loans for a single monthly payment, McClary said.

4. Cutting the life of your loan Another benefit is potentially paying off the loan faster.

“With a lower rate and faster repayment program, ultimately it’s costing you less,” Tayne said.

Cons Since the Coronavirus Aid, Relief, and Economic Security Act (CARES) extended the benefit of automatic forbearance for federally guaranteed student loans, it’s probably not the best time for people who need that protection to refinance their loans. Here is the list of some downsides:

  1. You could lose federal benefits
  2. There are refinancing fees
  3. You may not qualify for low rates
1. You could lose federal benefits If you refinance your federal loans, you would no longer have access to affordable repayment programs administered by the Department of Education. Borrowers will lose all of the benefits they currently have by refinancing, including losing fixed interest rates, Public Service Loan Forgiveness (PSLF), access to different repayment plans such as income-driven repayment plans, deferment and forbearance programs.

“You don’t want to lose benefits from a current program, so be aware of changes due to refinancing especially if you’re going from a federal loan to a private loan,” Tayne said.

2. There are refinancing fees Before you start refinancing your student loans, get a sense of what your new monthly payments will be using an ​online student loan refinancing calculator​ to get a sense of what could be.

Determine how much the fees for refinancing are. People whose credit score have dropped or those with less than stellar credit will often find that refinancing can actually increase their interest rates since low rates are reserved for borrowers with excellent credit scores, Tayne said.

3. You may not qualify for low rates “Loan companies often entice applicants by mentioning their lowest rates reserved for a small pool of borrowers, only to discover that they do not qualify for it or that they have to pay points or fees upfront,” she said.

Credible can reveal what refinance rates you qualify for. You can compare student loan refinancing rates from up to 10 lenders without affecting your credit. Plus, it's 100% free!

How to get the lowest interest rate on student loans People who want to get the best refinancing offer should consider ways to boost their credit score first.

Having a qualifying credit score is always important when seeking the most competitive refinancing terms, so make sure that you resolve any past due accounts or inaccuracies that might be doing damage to your score, McClary said.

“Get a free copy of your credit report before approaching the lender so there are no unpleasant surprises when they respond to your loan application,” he said. “If you are having debt issues preventing affordable repayment of credit cards and home loans, reach out and get help from a nonprofit credit counseling agency before refinancing.”

Tayne also said an excellent credit score can lower your interest rate and payments when you refinance.

“There are a lot of opportunities for those with great credit to increase their cash flow when refinancing by reducing interest rates and monthly payments,” she added.

Consumers should make sure they do not keep spending and get close to the credit limit of their credit cards because it will lower their credit score.

“The closer you get to your credit limit, the higher your credit utilization is,” she said. “High credit utilization could signal to lenders that an individual might have difficulty repaying their balances or that they're relying on credit to get by.”

See if you can secure a lower rate by refinancing your student loans today. Just plug in some of your information (like your current student loan balance and credit score, etc.) to find your rate within minutes.

This article was originally published by Ellen Chang, foxbusiness.com. 

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