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The Federal Reserve’s attempts to protect the economy during the coronavirus pandemic have pushed average rates for qualified borrowers refinancing student loans to new lows this summer.
According to an analysis of a sample of more than 17,000 student loan refinancings facilitated by the Credible marketplace, during June:
- Rates on 10-year fixed-rate loans averaged 4.48%, down 26% from a July 2018 peak of 6.05%
- Rates on 5-year variable-rate loans averaged 2.95%, down 37% from a September 2018 high of 4.68%.
Savings from refinancing
- $22,656 by refinancing into a 5-year variable-rate loan
- $8,686 by refinancing into a 10-year fixed-rate loan
|Monthly payment||Total interest charges||Savings|
|Existing loan (6.22%)||$945||$29,129||N/A|
|5-year variable (2.95%)||$1,513||$6,473||$22,656|
|10-year fixed (4.48%)||$873||$20,443||$8,686|
Opportunity to refinance private student loans
To provide relief from the economic impacts of the COVID-19 pandemic, Congress has suspended interest and payments on federal student loans through Sept. 30, 2020. Since it’s impossible to get a better rate than 0%, there’s little incentive to refinance federal student loans at the moment.
But many borrowers with private student loan debt are taking advantage of the low interest rate environment to refinance their education debt at lower rates.
Not only can student loan borrowers often qualify for a lower interest rate, but some choose to extend their repayment term when refinancing, which can dramatically reduce monthly payments. Lowering the monthly payment on your student loans can improve your monthly debt-to-income ratio, increasing the odds of qualifying for a mortgage.
Refinancing federal student loans
If the interest waiver on federal student loans is allowed to expire at the end of September, it will again make sense to look into refinancing federal loans if they have high interest rates, such as PLUS loans.
But refinancing federal loans with a private lender means giving up access to federal borrower benefits, such as access to income-driven repayment plans with potential loan forgiveness after 10, 20, or 25 years of payments. Although private student lenders may provide deferment or forbearance to borrowers experiencing economic hardship, private student loan forgiveness is typically offered only when borrowers become disabled or die.
It’s also important to keep in mind that Congress may approve additional relief for federal loan borrowers, including loan forgiveness. If you refinance federal student loans with a private student lender, those loans will not qualify for relief targeted to federal student loans.
Federal student loan borrowers who want to lower their monthly payments can often qualify for federal student loan consolidation, regardless of their credit score. Federal loan consolidation can lower your monthly payment by extending your repayment term. But because you don’t get a lower interest rate, your overall repayment costs may increase.
Why rates are low
To encourage borrowing and stimulate the economy, the Federal Reserve has slashed short-term interest rates to close to zero. The Fed is also buying up trillions of dollars in Treasury notes and mortgage bonds, which has helped push Treasury yields and mortgage rates to record lows this summer.
Falling yields on Treasury notes have reduced the government’s cost of borrowing, so rates on federal loans taken out during the 2020-21 academic year will be the lowest in history.
Like mortgages, many private student loans are securitized and sold into asset-backed securities. Although asset-backed securities backed by private student loans are not guaranteed by the government, they continue to attract investors who view refinanced student loans as less risky than other types of loans. Borrowers who qualify to refinance student loans typically have good credit and hold degrees in fields that are in demand, reducing the chance that they’ll be laid off during economic downturns.
Methodology: Average refinancing rates by month are based on loans funded by lenders competing to refinance student loans through the Credible marketplace. Variable-rate loans can rise and fall with benchmark interest rates. Savings from the refinancing calculation does not attempt to predict how rates on these loans could change over time. The savings calculation above assumes the rate will remain the same throughout the life of the loan, which is unlikely in practice. The calculations also assume that users will make payments on time, and that there will be no prepayments.
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