The coronavirus pandemic is impacting the economy in all aspects of life. The stock market is on a downward spiral and the Federal Reserve is slashing interest rates. What does this mean to someone who has private student loans? There has been an increase in the number of applications to refinance mortgages by close to 80% due to feds slashing rates, but what about refinancing private student loans?
If you are a borrower that is looking for private student loan refinance opportunities, you will want to read this to find out how waiving interest rates on student loans affects refinancing.
What does it mean to refinance private student loans?
It means to consolidate all your loans into one loan for a better interest rate.
Any interest that you have accrued thus far, will still need to be paid before any payments will apply towards the principal balance of your student loans. This freeze will not wipe out interest that you have already accrued.
How do student loan interest rates work?
The way that interest rates work on federal student loans is that the rate is fixed for the life of the loan. So when interest rates drop, you are ineligible to take out a new federal student loan to refinance existing federal student loans. However, with private loans, you tend to have a variable interest rate or fixed interest rates, which means that private student loan borrowers could see the impact immediately. Why? Because each month your payment may fluctuate. But what is the likelihood of that happening?
Private lenders will try to uphold higher interest rates as long as possible, which is why it could take a while longer for your payments to reflect any federal funds decrease. However, typically it is based on a 1-month or 3-month LIBOR index so changes can reflect in less than a month.
What does it mean when the Fed slashes rates?
If you have a federal student loan, this rate is governed by Congress. If you have private student loans it is impacted by the U.S. Central Bank, which adjusts the benchmark that a lender can charge you for interest. Due to the wide-spread coronavirus, the feds have slashed rates to near zero, which means that lenders can borrow at lower rates which should force them to lower the rates that you receive.
What does this mean for You?
The simple way to put this is if you had to take out private, non-federally serviced student loans because all your other options were exhausted, then you can breathe a short sigh of relief. You should see a drop in your monthly payments- eventually
That’s not the only thing that it means. This is also the best time to refinance those private student loans at a lower interest rate. You also have the option of refinancing federal student loans into private student loans to take advantage of the new interest rates, however, financial experts will advise against that for many reasons including:
- Federal student loans can have a lower interest rate than private student loans
- You will no longer be eligible for deferments, forbearance, or loan forgiveness options on those loans.
What are your chances of being able to refinance private student loans?
The chances depend on your current situation. This includes the following:
- Credit history
- Income
- Loan program
- Profession
Generally speaking, you will need a high credit rating with a proven steady and stable income, Otherwise, you may be denied and would need to obtain a cosigner.
What you should know before refinancing
If you are thinking about refinancing your private student loans due to the emergency rate cut announced by the feds, here are some things you should consider before taking the dive:
- You should shop around with multiple lenders to receive the best rates.
- Make sure the lenders are performing soft credit checks, hard inquiries will have an adverse effect.
- Carefully read the fine print before deciding to go with a lender.
- Consider your options, such as is this the time for you to refinance. Look at the total cost of the loan rather than just the payments. Keep in mind payments can be higher with a lower overall cost.
- Is there a prepayment penalty and how many times can you refinance? This is what you need to ask the lender before refinancing.
Reasons people refinance their loans
Here are some reasons why people choose to refinance their private student loans when the feds slash rates:
- A borrower has a variable rate and is looking to for a lower fixed-rate loan
- Their credit has improved since they took out the loan. They want to see if they can remove a cosigner.
- They are looking for lower monthly payments
- They have multiple lenders and want to consolidate their loans into one lender.
If this sounds like you, then you should look into refinancing your private student loans. You are not required to do all of your loans at once, and there’s also a possibility that you can customize your own loan payment or choose your payment term.
What options are available?
When you are refinancing your private student loans, you should know what options are available to you. You can refinance from variable-rates to fixed-rates or vice versa. When it comes to refinancing there aren’t a lot of options, like federal repayment programs. You just need to find the right lender and decide if the terms fit your needs.
What are the current interest rates?
Interest rates on private student loans vary depending on your credit. Once again, unlike federal student loans, not everyone is approved and not everyone has the same interest rate. However, the opportunity is there for you to lower your interest rate since rates are currently at an all-time low.
What does the future hold?
When you make the choice to refinance, you can’t predict what the future will hold. If you choose to refinance with variable rates, you are at the mercy of the lender and the Feds. Meaning, you can refinance now for the lower rate, but the rates can increase in the future. With that in mind if you feel that the adjustable rate is your best fit, then you want to find out about the way rates are capped.
Bottom Line
The bottom line is that the fed rates are at an all-time low and they have been slashed to near zero due to the coronavirus pandemic. Now is the time to refinance those private student loans if you meet the eligibility requirements.
