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Don’t Wait to Refinance These Student Loans

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Fifty percent of Americans with private student loans are currently considering refinancing them since interest rates have dropped dramatically, according to a May 2020 survey commissioned by NerdWallet and conducted online by The Harris Poll.

But that number should probably be closer to 100%, as student loan refinance rates have continued to fall even since May.

If you have private student loans, refinancing them as soon as you can get a lower interest rate should be a no-brainer. Here’s why.

You can cut high interest rates

The average maximum fixed interest rate on private student loans is currently more than 10%, according to NerdWallet data. Your private loans may have an even higher rate.

Amenda Almonte graduated from the State University of New York at Stony Brook in 2019 with private student loans totaling over $27,000 — at an interest rate of 11%.

Looking to decrease the more than $250 she’d pay in interest each month, Almonte found out about student loan refinancing.

Almonte, now 26 and living in Queens, New York, says she “thought it was a scam” at first because a lender offered to cut her double-digit interest rate by more than half, to 4.3%.

“I saw the interest rate,” she says, “and was like, OK I’m sold.”

Refinancing high-interest private loans can save you money now and in the long run. For example, if you owed $27,000 at 11% interest, refinancing to 4.3% would roughly lower your payments by $100 and your overall interest costs by $11,400, assuming a 10-year repayment plan.

You don’t need perfect finances to save money

Student loan refinance lenders typically want borrowers with a FICO credit score in at least the high 600s, as well as a monthly debt-to-income ratio below 50% — including your existing loans.

That’s just to qualify, not necessarily to get the lowest possible rate. But because most refinance lenders don’t charge upfront fees, any rate reduction can save you money.

When Clayton Treible graduated from Indiana University of Pennsylvania in 2018, he owed roughly $78,000 in private loans. They had an average interest rate of 11%.

Treible, now 24 and living in Baltimore, says he “had a mini panic attack” after realizing the monthly payments on those loans would be more than $1,000.

He wasn’t sure he’d be able to refinance due to his limited credit history and high debt-to-income ratio. He got approved, but the lowest rate he qualified for was 7.23%.

“It seemed like a pretty good deal compared to the 11%,” he says.

Treible also opted to stretch his repayment term to 20 years. Combined with the lower rate, his payments dropped to $577.

Extending your term can increase your repayment total. But as your finances improve, you can refinance again to manage those costs. That’s what Treible did in April; his loans are now on a 12-year term at roughly 5% interest.

You won’t lose federal benefits

Borrowers with federal student loans shouldn’t refinance right now. The Coronavirus Aid, Relief, and Economic Security Act suspended payments and interest on those loans through Sept. 30. Refinancing, which only private lenders offer, would cost borrowers those benefits.

That same risk doesn’t apply to private student loans.

Private student loan relief is available from many lenders, typically via a payment break known as a natural disaster forbearance. But interest still accrues during these breaks — unlike with what’s in the coronavirus relief act — and forbearance may be running out soon.

For example, student loan servicer Navient offered a three-month break to those affected by the pandemic. That ended June 30. Eligible borrowers can extend that forbearance through July but will need to make other payment arrangements thereafter.

Federal loan borrowers who’ll eventually need long-term relief can look to programs like income-driven repayment. But most private student loans don’t offer those types of programs, making refinancing potentially your best opportunity for lower payments if you can qualify.

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