AS AMERICANS AROUND THE country stay at home and social distance to slow the spread of the COVID-19 disease caused by the novel coronavirus, chances are you have some extra time on your hands. If you have federal student loans and refinancing those loans is on your to-do list, you may be wondering whether now is a good time to take advantage of historically low-interest rates.
Much like mortgage refinancing, student loan refinancing allows you to take on a new loan that will pay off your existing student loan or loans. Any benefits, rates, and terms that you had on your existing loan or loans are replaced by the terms, benefits, and rates of the new loan. The federal government doesn’t refinance student loans, but you can refinance with a private lender, which includes state-based and nonprofit organizations.
Refinancing a federal student loan can save you money over time, but it means you will no longer have access to the benefits of the federal student loan program. That includes the six-month 0% interest rate on federally held loans and suspension of payments on them, which are emergency provisions in the CARES Act meant to help federal student loan borrowers financially affected by the COVID-19 pandemic.
Keep in mind that this pause is only temporary, which means that refinancing after the benefit expires can still save you money in the long term. Being an informed student loan borrower means doing your research, and if you plan to refinance within the next year now is still a great time to start preparing.
Use this time to learn the basics and assess whether there are any steps you need to take. For example, if you have a low credit score that affects your ability to get a great deal on a refinance loan, you can use this time to improve your credit score or find a co-signer.
As the coronavirus outbreak continues, here are three things you can do now to prepare for student loan refinance:
- Consider your credit report and score.
- Learn how to compare quotes.
- Consider borrower benefits.
Consider Your Credit Report and Score
Many people don’t know they can look at their own credit report, and if you’re not already doing this regularly you should start now.
The quotes that you receive from each refinance lender will be based on the information on your credit report, including your credit score, whether you are current on all your existing accounts and your debt-to-income ratio. Some lenders consider additional data like the amount of money you have in savings accounts or your education, but your credit rating and the report will likely receive much more weight than these other factors.
Your FICO credit score is calculated using the information on your credit report. The data is grouped into five categories and weighted as follows: payment history, 35%; the amounts you owe, 30%; the length of your credit history, 15%; new credit, 10%; and whether you have a mix of different types of credit, 10%.
To improve your credit score, look at how you perform on each of these factors. Making on-time payments on all your accounts will help, if you are not doing that already. But you may also want to consider whether you can build a better mix of credit by opening a new credit card and paying it off every month, or decreasing your total amount of debt.
Learn How to Compare Quotes
Interest rates vary from loan to loan, and even seemingly small differences can have a big impact on the amount you will pay. When deciding whether to refinance, you should first look at whether the best interest rate quote you receive is higher or lower than the highest interest rate on your current student loans.
Interest rates can vary by lender and loan type, so make sure to get quotes from several lenders. When you compare interest rates, look at whether the quoted rates are variable, which means they will change over time based on market conditions or fixed, which means they will not change. A variable rate may be lower initially, but it comes with some risk since you do not know how the rate will change.
Note that many lenders offer a reduced interest rate if you agree to an autopay option, and this may be included in the rate that you are quoted. As you compare your student loan options, make sure you pay attention to the fine print to fully understand what is and is not included in the quoted rate and what is required of you to receive it.
The length of time to repay your loan also matters when you are comparing interest rates. Interest accrues over time, so the longer it takes you to pay off your loan, the more interest you will pay – possibly even if the interest rate is lower.
Consider Borrower Benefits
If you refinance federal student loans, be aware that you will lose access to any existing benefits offered by the federal loan program, including Public Service Loan Forgiveness and income-driven repayment plans. You should review these benefits carefully as you think about whether a private student loan is right for you.
But that doesn’t mean your private loan can’t have any borrower-friendly benefits. When you shop for loans, look at what lenders are offering, including such benefits as loans with no upfront fees, the ability to pay off your loan early with no penalties or loan deferment for graduate school enrollment.
You can also look for nonprofit and state-based organizations that offer refinance loans at foryounotforprofit.org.
If you are thinking about refinancing your federal student loans, don’t procrastinate. You can start planning now to refinance later.
– This article was originally posted on US News