Look beyond interest rate when mulling refinancing

If you’re thinking about refinancing your student loans to save money, the next few months provide a window of opportunity thanks to the Federal Reserve. But don’t base the decision solely on the interest rate.

In recent months, rates have fallen for fixed-and-variable-rate student loans offered by private lenders, such as banks and credit unions. If you can get a better rate, even one that is modestly better, it is always best to at least consider refinancing.

Rates for borrowers refinancing into 10-year fixed-rate student loans in August averaged 4.7%, down 22% from a year ago, according to an analysis by Credible, a rate comparison website. Variable-rates have fallen to about 4.03%, down about 14% from a year ago, Credible said.

Credible calculates that a borrower repaying the average graduate school debt of about $84,000 at a rate of 6.36% could save $8,327 over the life of the loan by refinancing into a 10-year fixed-rate loan. A borrower could save about $21,000 in payments by refinancing into a five-year variable-rate loan, Credible said.

If Federal Reserve policymakers continue to reduce rates slightly the remainder of this year — no sure thing, of course — it might behoove more borrowers to take the refinancing plunge. It can be especially helpful if borrowers can consolidate multiple student loans into one.

That said, refinancing to save money on interest isn’t always a good idea, said Greg McBride, an analyst with Bankrate.com.

About 90% of the estimated 45 million people with student loan debt have federal loans with fixed interest rates. Those rates, which are set annually by Congress and not the Fed, are locked in for the life of the loan.

Federal student loans you have already taken out for this school year won’t see any impact from the Fed’s rate cuts, since those rates have been set. But if you need to borrow money next year, the new federal loan might have a lower interest rate.

McBride does not recommend refinancing federal student loans into private loans. Federal loans offer “many valuable protections that no other form of borrowing does,” he said. Those protections include payment deferments, forbearance, income-based repayment, and debt forgiveness in some instances.

Those programs disappear if you refinance your federal loan with a private company.

While borrowers with a variable interest rate on a private student loan might likely get a lower initial rate by refinancing, they’ll also be exposed to rate hikes going forward.

It is also important to read the fine print, said McBride. “Look beyond the interest rate,” he said. “Make sure there aren’t upfront fees or prepayment penalties that defeat the purpose of refinancing.”

Another cautionary point: Avoid stretching the term of the loan beyond the time remaining on the initial loan because any additional payments will erode your interest savings, McBride said.

When is it best to refinance with a private loan? As soon as you have stable income and good credit.

“The benefit is likely to come more from an improvement in the borrower’s own financial situation, such as a higher credit score and lower debt levels, that qualify them for better offers than a modest drop in interest rates,” McBride said.

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