Student loan refinancing rates continue to drop. Based on an analysis of 23 lenders’ advertised rates, the average minimum fixed interest rate on refinanced student loans was 3.51% on July 1.
That’s a 12% decrease compared with the rate when NerdWallet began collecting this data in January 2019.
If you can qualify for a lower interest rate, refinancing can shrink your monthly bills, the total amount you repay or both. For example, refinancing a $10,000 student loan from 7% to 3.5% would save you $17 each month and $2,066 overall, assuming a 10-year repayment plan.
But refinancing isn’t for everyone. Here’s how to tell if you should take this step right now.
Should you refinance student loans?
Most federal student loan payments are paused interest-free until Sept. 30 as part of the Coronavirus Aid, Relief, and Economic Security Act. Wait until this relief ends to refinance federal loans.
When you refinance, a lender pays off your old loans and issues you a new loan with new terms. Only private lenders refinance student loans. By refinancing federal loans, you’ll forfeit the remaining payment suspension from the CARES Act, as well as additional government benefits such as income-driven repayment plans and loan forgiveness programs.
If you won’t need those programs in the future, use this time to improve your finances by building your credit score or paying off debt. That will put you in a position to get the best possible refinance rate once the payment suspension expires.
Don’t wait to refinance if you have private student loans. These loans don’t qualify for CARES Act benefits, and because refinance lenders typically don’t charge fees, you’ll start saving money immediately with a lower interest rate.
Do you qualify to refinance?
Even if you should refinance private student loans, you’ll still need to qualify to do so.
You typically must have a FICO credit score in at least the high 600s, as well as a debt-to-income ratio below 50%. That means your monthly bills — like student debt, housing payments and other loans — can’t take up more than half your monthly income.
Keep in mind that meeting a lender’s requirements doesn’t mean you’ll get the lowest advertised rates.
You’ll need a higher credit score, lower debt-to-income ratio and to meet additional criteria to do that. For example, you may need to choose the shortest repayment term — five years, among most lenders. Lenders’ advertised rates, including those in NerdWallet’s data, also often include a discount for enrolling in automatic payments. This is typically 0.25 percentage points.
You may need a co-signer to hit a refinance lender’s benchmarks, especially if you’ve had recent financial difficulties. While some private lenders are offering payment suspensions due to the pandemic, interest accrues during these breaks.
Another alternative is to ask your lender about modifying your existing private loan’s terms, but few offer this option. To get a lower interest rate or change your payment structure long-term, refinancing private student loans will likely be your best bet.