This post is in collaboration with Juno.
You’ve probably seen a lot of talk about student loans lately.
Interest rates are super low at the moment.
The pandemic has put federal student loans into forbearance. But what that means for your long-term student loan game varies based on your repayment plan.
You’ve heard murmurs that Biden has initiatives surrounding student loan forgiveness he’d like to see passed into law.
Student loans are a complex topic even in less overwhelming times. If you’re wondering if it’s smart to refinance your student loans right now due to the low interest rates, the answer can be, ‘Yes.’
But only for a small portion of people.
Why would I refinance my student loans?
The primary reason people consider refinancing is to secure a lower interest rate.
Not everyone will be able to secure a lower interest rate through refinancing. There are also several other criteria to consider before refinancing your student loans.
Should I refinance my federal student loans?
Most people probably shouldn’t refinance their federal student loans. When you refinance, a private bank is taking on the student loan that was previously handled by the Department of Education (ED). Refinancing may qualify some borrowers for a lower interest rate.
But at the same time, those borrowers lose access to advantageous federal programs.
Federal repayment plans
One of the biggest programs you’ll lose access to is income-driven repayment plans. Many borrowers qualify for one of the following three programs, depending on the type of federal student loan:
- Revised Pay as You Earn (REPAYE) Plan. Caps your monthly payments at 10% of your disposable monthly income. Undergraduate loans considered paid-in-full after 20 years of payments. Graduate loans considered paid-in-full after 25 years of payments.
- Pay as You Earn (PAYE) Plan. Caps your monthly payments at 10% of your disposable monthly income. You won’t qualify for PAYE if 10% of your disposable monthly income would be more than you would normally pay under a Standard Payment Plan. Loans considered paid-in-full after 20 years of payments.
- Income-Based Repayment (IBR) Plan. Caps your monthly payments at 10% of your monthly income if you borrowed money on or after July 1, 2014, with loans considered paid-in-full after 20 years. Cap is 15% of your monthly income if you borrowed before July 1, 2014, with loans considered paid-in-full after 25 years.. You won’t qualify if the 10%-15% cap is more than what you’d pay under a Standard Payment Plan.
When you’re on an income-driven repayment plan, you may end up paying less over the course of your loan than what you’d pay over all with a private refinance — even if that refinance has a lower interest rate.
This is more likely to be true if you aren’t high-income.
Federal student loan forgiveness, cancellation & discharge.
You’ve likely heard of the Public Service Loan Forgiveness (PSLF) program. With this program, you make 120 qualifying payments while working for a qualified governmental or nonprofit employer. Then, you can apply to have any remaining debt forgiven.
While PSLF is the most recognized forgiveness program, there are several other programs for student loan cancellation or discharge, including:
- Up to $17,500 of student loan forgiveness for eligible teachers.
- Cancellation for specific Perkins loans.
- Discharge of loans due to disability, school closure and in rare instances bankruptcy.
Refinancing your loan with a private lender means you’ll no longer have access to such programs.
Should I refinance my private student loans?
Maybe. Your private student loan already doesn’t come with access to advantageous federal repayment or forgiveness programs, so you have less to lose.
If you can qualify for a refinance with a lower interest rate, you’ll want to ensure that you’re still paying less over the course of your loan. Look out for these costs that can make the lower interest rate a moot point.
Application & origination fees.
When a company charges application and/or origination fees, your loan becomes more expensive. Depending on the size of these fees, they can eat into any savings you’re getting from the lower interest rate.
When comparing rates, make sure you’re looking at the APR rather than the interest rate. The APR accounts for the additional costs of origination fees combined with the interest rate.
Prepayment penalties prevent you from paying off your debt early. There are plenty of lenders that don’t charge prepayment penalties. Seek these lenders out.
Ideally, when you refinance, you won’t be moving your final payoff date further into the future.
When you extend your loan term, you might secure a lower interest rate — or even a lower monthly payment — but end up paying more over the life of your loan simply because you’re paying that interest over a longer time period.
Fixed rates vs variable rates.
The lowest rates you’re offered on a refinance are likely to be variable. That means as the Fed raises interest rates, the rates on your loan will change, as well.
Fixed rates stay the same throughout the course of your loan.
We are currently in a low-interest environment. While the variable rates may be lower than the fixed rates, they have nowhere to go but up in the future.
Meanwhile, if you secure a fixed rate, it may be a little bit higher than the variable offer, but it will stay consistent throughout the course of your loan. When the Fed raises rates again, your loan interest will stay put.
There are very, very few people who successfully take advantage of variable-rate loans, and they usually have enough money on hand to pay off the loan before the term ends. Even then it can be a risky scenario to put yourself in.
You should almost always seek out a fixed-rate refinance.
Should I wait to refinance until Biden’s in office?
Any new policy will affect federal student loan borrowers more than private student loan borrowers.
The Biden Administration does have a comprehensive wishlist for higher ed, including federal student loan forgiveness. Some of the wishes include:
- If you’re making $25,000/year or less, you wouldn’t owe any payments or interest on federal student loans.
- Everyone else would pay 5% of their discretionary income above $25,000/year towards student loans. This is lower than the 10%-15% currently offered by income-driven repayment plans. Any remaining balance after 20 years of payments would be forgiven.
- You would no longer have to pay taxes on the forgiven portion of your federal student loans.
- Ten thousand dollars of loan forgiveness per year for public servants for up to five years.
However, turning all of these wishes into laws is going to be an uphill task. Even with Georgia securing the Senate for Biden’s party — even if every last Democrat approves a bill that would turn all the wishes into reality — with such a slim majority the Republicans still have an opportunity to filibuster.
For that reason, some have suggested that Biden should issue an executive order offering $50,000 in forgiveness to all student loan borrowers. On the campaign trail, Biden said he might do something of the sort, but the number he used was $10,000.
Whether or not any of these policies will come to fruition is anyone’s guess. Keep an eye on the news, but as of right now these ideas are not beyond the wishlist stage.
But you should wait out Coronavirus policy.
During the pandemic, federal student loans have been placed in administrative forbearance. That means that you do not have to make any payments until January 31, 2021.
During this period, your loans are not accumulating any interest.
If you are on a Standard Repayment Plan, you will still owe the same amount of money after the forbearance expires. Your payoff date remains the same, which means if you’re not making payments during this time, you could end up with higher monthly payments after the pandemic.
Those best served by this forbearance are those who are on income-driven repayment plans. You don’t have to make payments during this time, but all these pandemic months still count towards your 20 years of repayment even if you pay $0 during this time.
When forbearance expires, you’ll go back to your pre-pandemic payment. Essentially, from March 2020-January 2021, you got credit for payments you didn’t have to make. Zero-dollar payments during this time also count towards PSLF.
When the new administration takes over in a few days, it is possible that the new ED will extend the administrative forbearance. An extension in context of the pandemic would be easier to achieve.
UPDATE: Biden ordered an extension of the administrative forbearance on his first day in office. Once ED approves the order, the forbearance will extend through September 30, 2021.
Who shouldn’t refinance their student loans?
The lowest interest rates are offered to those with the best debt-to-income ratio and the highest credit scores. A high income certainly helps with both of these criteria.
If you’re carrying federal student loans and are not high-income or not working in public service, you may find that lower interest rates are not worth losing access to income-driven repayment plans or forgiveness programs.
Who should consider student loan refinancing?
If you have private student loans, a high income and a good credit score, refinancing may be an option for you.
It may also be an option if you are in the same circumstances with federal student loans — especially if you have loans from grad school. Just make sure you’re secure in your high-income job and that you truly wouldn’t benefit from the advantaged programs that come along with federal loans.
Whether you have federal or private loans, when you refinance you’ll want to make sure that application and/or origination fees are low to non-existent. You’ll also want to ensure that the loan term doesn’t negate the lower interest rates, which are preferably fixed.
How do I find the lowest interest rates on student loan refinancing?
To ensure you’re getting the lowest interest rate on your student loan refinance, you’ll want to do some comparison shopping. Remember to look beyond the interest rate. Make sure the loan is overall less expensive after accounting for loan term extensions and origination fees.
Typically when you apply for a loan, you don’t get an opportunity to negotiate with the lender. They tell you the rates and terms you qualify for, and that’s that.
But there is another option. Companies like Juno negotiate for borrowers en masse, giving them more leverage and allowing you to secure better loan terms. To date, Juno has helped its members save over $26M in interest and fees.
Using Juno to secure lower rates.
Joining Juno is free. You’ll submit some basic personal information, including an estimated credit score and income. These numbers don’t have to be spot on, and Juno will not do a credit check. But you do want them to be relatively accurate.
After you sign up, the company gets to work. They present a large group of student loan borrowers — including you — to several banks and online lenders. Then they have those lenders compete over your collective business. The lender that offers the lowest bid is the one Juno picks.
They then come back to you with the rates and terms they were able to secure for your group in their negotiations. These negotiations happen once-per-year in the Spring.
Juno only works with a handful of lenders. The lowest fixed APR reported by Juno is extremely competitive at 2.25%. Your offered rate could be higher depending on things like income and credit score. Check the APR and terms offered by Juno against other refinance offers from outside lenders to ensure thorough comparison shopping.
You can then choose to take or leave the refinance offer from Juno. If you choose to take it, you’ll use a link sent by Juno to fill out your application directly with the lender.
The lender will do a hard pull on your credit to ensure you qualify for the negotiated rate. This is why it was so important to give an accurate credit score earlier on in the process.
As long as you meet the parameters for the negotiated rate, you’ll be ready to sign your documents directly with the lender. Juno does follow up with you to ensure you’re getting everything the lender promised in negotiations.
Why use Juno?
There are lots of student loan refinancing options. Juno is worth looking at because:
- They may be able to negotiate a lower interest rate than you’d qualify for on your own.
- They attempt to secure other benefits you normally wouldn’t qualify for with a private loan, such as loan discharge in case of death or disability.
- Signing up for Juno is free and risk-free. They don’t run a hard or soft credit pull. And if you aren’t in love with the loan terms they come back with, you are under no obligation to accept.