If you’re dealing with student loans with interest rates of 6%, 7%, or even 8%, you know how fast interest charges can accrue. Your loans can quickly balloon, and it can seem like your monthly payments never make a dent in the loan balance.
You may have heard that student loan refinancing can be an effective way to lower your interest rate. But you may be wondering, “When is the best time to refinance student loans?”
Due to notable interest rates cuts, lenders are offering very low variable and fixed-rate loans. Depending on your situation, the best time to refinance student loans may be right now.
5 reasons why right now is the best time to refinance student loans
While the country is still reeling from the effects of the COVID-19 pandemic, refinancing your debt can make a lot of sense if you are in a relatively stable financial position for the following reasons:
1. Federal Funds Rate and LIBOR Rates are low
Thanks to major rate cuts, top student loan refinance companies can offer lower interest rates and help you save money.
Federal Funds Rate
The Federal Reserve cut interest rates in an attempt to provide some relief during the coronavirus pandemic. The Federal Funds Rate is currently at 0.25%, a remarkably low rate. Just one year ago, it was 2.25%.
When the Federal Funds Rate goes down as it has in the past few months, loan interest rates decrease as well. You can qualify for low interest rates on fixed-rate refinancing loans, locking in a competitive rate for the length of your repayment term.
Some refinancing loans are variable, meaning the interest rate fluctuates over time. Variable-rate loans are typically tied to the London Interbank Offered Rate (LIBOR). The lenders charge you an APR that is based on the LIBOR rate plus their margin. If the LIBOR rate increases over time, your APR will change, as well.
Current LIBOR rates are extremely low. As of July 30, 2020 — the last available data — the three-month LIBOR rate was 0.251%. That’s quite a difference from January 2, 2020, when the three-month LIBOR rate was 1.90%.
To put those numbers in perspective, consider this: If you had refinanced in January and a lender had a 2% margin, the lowest rate you could expect would be 3.90%. But if you refinance now with a lender with the same margin, you could qualify for a rate of just 2.251%.
2. Federal CARES Act relief is coming to an end
If you have federal student loans, you likely qualified for the CARES Act. Under the CARES Act, the government temporarily suspended federal student loan payments and set interest rates on existing student loans to 0%. However, this relief program is currently set to expire on January 31, 2021.
If you have high-interest federal loans, such as PLUS Loans, want to reduce your monthly payments, or want to pay off your student loans faster, refinancing your loans can be a smart way to tackle your debt.
3. You have good to exceptional credit
If you’re looking for the best time to refinance student loans, take advantage of your good credit right away. Many people struggle with credit issues, so having a strong credit score makes you stand out as a refinancing applicant. According to Experian, 46% of Americans have a credit score of 740 or better, with just 21% in the exceptional category.
With a high credit score, you can qualify for the lowest advertised interest rates and most favorable loan terms from lenders.
4. You have a secure job
Unfortunately, this is a volatile time for our economy. The number of people collecting unemployment is estimated to be near 30 million. If you’re thinking about when to refinance student loans, you want to make sure your job is secure, and your finances are stable.
If you have federal loans and refinance your debt, you’ll lose federal benefits like access to income-driven repayment plans and loan forgiveness, so you need to be certain about your job security.
5. You have a cosigner
If your credit is less-than-stellar, you can still take advantage of today’s low interest rates if you have a parent, relative, or close friend who is willing to act as a cosigner. A cosigner is someone with good to excellent credit and steady income who cosigns your loan application and guarantees the loan. If you stop making payments, the lender will require the cosigner to pay them instead.
Adding a cosigner to your loan application decreases the lender’s risk, so the lender is more willing to approve your application and offer you a lower interest rate than you’d get on your own.
While asking someone to be a cosigner is a big favor to request, it doesn’t have to be a long-term commitment. Some lenders offer cosigner releases. After you prove yourself to be a trustworthy borrower by making your payments on time for a few years — often 24 to 48 months — you can apply to have your cosigner removed from the loan.
Compare student loan refinancing offers
When is the best time to refinance student loans? It’s hard to beat right now. Lenders are offering the lowest rates we’ve seen in years, so you could save thousands of dollars by refinancing your loans.
Before selecting a lender, make sure you shop around and get quotes from multiple refinancing companies. Rates can vary from company to company, and you may get a much lower rate from one lender over another.
While you can comparison shop on your own, the process can be time-consuming and overwhelming. Purefy offers an easier way with its Compare Rates tool. You can answer just a few simple questions and get quotes from top student loan refinance companies in minutes, without impacting your credit score.