Should I refinance my student loans?
A question that depends on so many factors…
Let’s start with some basics. First, let’s make the distinction between Direct Loans(federal loans issued directly by the US Dept. of Education), and private loans, which are issued by any number of private financial institutions, banks, credit unions, etc.
Private loans are first to consider for refinancing (will explain why and how momentarily), but Direct Loans require a much deeper level of consideration.
Private Loans
For private loans, they will have many different factors to consider. Is the interest rate fixed or variable? In our rising interest rate environment, refinancing to a fixed rate would make sense. If the term is relatively shorter, such as 10 years, refinancing to a longer term, such as 20 years, could add flexibility. Interest rates will also vary, and while interest rates have risen in the past year, credit score and the length of the loan could lead to refinancing to a lower interest rate.
Each of these factors is very dependent on an individual or a couple’s financial situation. It boils down to a monthly payment, interest rate, and length of the term. The factor that is most important to your overall plan should be favored, but all factors must be considered. Establishing a good credit score (generally a FICO score of 670 and above) will give you favorable options.
Direct Loans
For Direct loans, there are many more factors to consider. As many are aware, the interest rate is fixed, so recent increases in interest rates by the Fed are not impacting interest rates. The other considerable factor is flexibility. It’s been very well known that the repayments have been suspended since March 2020 due to the pandemic. As we await a decision by the Supreme Court, many borrowers may have up to $20,000 forgiven. Lastly, there are other income-driven plans the federal government offers, which are based on family size and income – which can also count towards the eventual Public Service Loan Forgiveness (PSLF) program through the Dept. of Education.
If you are to refinance to a private loan, nearly all of these features can be lost.
So… Should you refinance your student loans?
That will depend on a number of factors. Feel free to reach out to me to discuss.
