Interest rates remain low since the Federal Reserve chose to keep short-term interest rates at nearly zero in an effort to stimulate the economy amid the coronavirus pandemic.
People who have large amounts of student loans can benefit by refinancing them into lower rates, which can help pay loans down faster. Undergraduate borrowers who received direct subsidized or unsubsidized loans after July 1, 2020, received a fixed interest rate of 2.75% while parents who obtained a Direct PLUS loan saw a fixed interest rate of 5.3%. Refinancing can also reduce or extend payment terms, depending on your current employment situation and other debt such as credit cards.
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!
5 steps to help you get the best student loan refinancing deal
Here are five steps to follow before you refinance your student loan for the best offer:
- Look at the loan type
- Check your credit score
- Calculate your interest and use a student loan refinancing calculator
- Shop and compare lenders
- Get approved
1. Look at the loan type
Consider refinancing your private student loans because interest rates are at historic lows.
“Now is a good time to take advantage of these low rates, which could potentially save some borrowers hundreds or thousands in interest over the life of their loans,” said Barry Coleman, vice president of counseling and education programs for the National Foundation for Credit Counseling, a Washington, D.C.-based non-profit organization.
Multi-lender marketplace Credible can help you compare private lenders at once to determine if now is the right time to refinance, based on your loan type, loan amount, and more.
Interest rates for federal student loans will remain at zero through the end of 2020 due to the forbearance provided by the CARES Act, so refinancing them now should not be a priority. Federal student loans also come with other protections such as repayment based on your income and loan consolidation.
“Once a federal loan is refinanced with a private lender, it is no longer a federal student loan and, therefore, private loan terms will apply,” he said.
Federal student loans always have fixed interest rates, but private loan lenders offer both variable and fixed rates.
“Private student loans almost always require good credit or a cosigner to qualify, whereas federal loans only perform credit checks on PLUS loan applicants, typically the student’s parents,” said Leslie Tayne, a Melville, N.Y. attorney specializing in debt relief. “Students with financial needs may be eligible for subsidized loans, which are seldom available with private loans. Subsidized loans mean that the government pays the interest fees on behalf of the borrower while they’re a student.”
Again, use an online tool like Credible to get prequalified student loan refinancing rates without affecting their credit score.
2. Check your credit score
With less-than-excellent credit, borrowers may find that the new loan rate might not be any better than their current loan or might not cover the entire balance, she said. You can check your credit score for free through the three credit reporting bureaus.
“Consumers should see where their credit needs improvement before deciding to refinance and also inquire with a bank about the process to have an idea where they stand in the loan process,” Tayne said.
Determining your credit score prior to applying for a loan gives you an idea of the terms that are available.
“Knowing this will help you determine if the refinancing offer is appropriate for your level of credit and would provide any savings to make refinancing worthwhile,” Coleman said.
If you're confident in your credit score, then you can plug in some of your information into Credible's free online tool to find out what kind of refinance rates you qualify for today.
3. Calculate your interest with a student loan refinancing calculator
Before you start the process to refinance your student loan, a refinancing calculator may be useful to determine how much money you could save and what those monthly costs will be. A lower interest rate can help you save thousands of dollars over the life of your loan and help you pay it down sooner.
Use an online student loan refinancing calculator to get a sense of what your new monthly payments could be.
4. Shop and compare lenders
Borrowers should shop around for the best deal when refinancing for student loans to avoid buyer’s remorse and to be sure that they are getting the best rate, loan terms, and ease of the application process, Tayne said.
Use an online tool like Credible to view a rates table that compares rates from multiple lenders at once.
5. Get approved
Before you apply to refinance a student loan, check your credit score and obtain any paperwork you might need, such as paycheck stubs, to help speed up the process.
Check your credit reports to ensure that the information being reported is accurate. If a borrower has damaged credit because of late or missed payments, it may be best to wait before applying for a new loan in order to get a better deal, Coleman said.
If your credit score has dropped, you should take steps to improve it.
“A steady history of on-time credit payments, paying balancing down to reduce credit ratios below certain levels and not applying for too much credit are all actions that borrowers can take to improve their credit rating,” he said. “The better the credit score, the better the credit terms a borrower will qualify for.”