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Published: Mar 09, 2020 8 min read
Francesco Ciccolella for Money

If you have student loans, you’ve seen the ads in your mailbox, on social media, on TV commercials. Refinance your student loans, they shout, and you could save thousands.

While the ads are a constant, their pitch is especially compelling right now. After the Federal Reserve cut interest rates three times in 2019 and then again unexpectedly last week, rates for student loan refinancing are among the most competitive they’ve been in years. The average fixed rate for a 10-year refinanced loan in February was 4.80%, up slightly from December’s low of 4.76%, according to data from lending marketplace Credible.

Competition for borrowers has also likely helped drive down rates. In the early days of refinancing, a handful of startup lenders had the space to themselves. Today there are several fin-tech companies and traditional banks that offer refinancing, and borrowers have multiple online tools to shop for rates among them.

As of the end of 2019, four major lenders had $26 billion in securitized refinanced loans, according to credit rating agency DBRS Morningstar. There was a surge in refinance originations at the end of last year due to dropping rates, says Jon Riber, senior vice president of structured finance at DBRS. There's no official number on the size of the whole refinance market, but Riber estimates it's around $40 billion in refinanced loans. (That's a fraction of the country's more than $1.5 trillion in student loan debt.)

With lower interest rates and more lenders to choose from, is now a good time to refinance your student loans? Here’s a guide to help you decide.

If You Have Federal Student Loans

When you refinance your student loans, you’re leaving the federal portfolio and getting a new private loan. That’s not a decision to make lightly. The federal system—which comprises about 90% of the country’s student loan volume—offers more protections than the private market.

Federal borrowers have access to several types of repayment plans, including ones that set their monthly payments based on how much they earn. You can also qualify to have federal loans forgiven, either through working in the public sector for a decade or paying in an income-driven plan for at least two-decades. There are more options for deferment and forbearance, too.

That means you have to decide whether the chance for a lower interest rate (more on that below) is worth giving up those opportunities.

Travis Hornsby, founder of Student Loan Planner, tells borrowers if they work in the private sector, have an emergency fund, and have an annual salary of at least 1.5 times what they owe, then they can make a good case for refinancing. (He earns a commission on his website when visitors refinance.)

Other student loan experts tell borrowers to be more cautious. Betsy Mayotte, founder of The Institute of Student Loan Advisors, which provides free advice to borrowers, says she’s heard many stories from people who refinanced federal loans to get a lower rate but later found they wished they had access to the more flexible options.

“Once you refinance, there’s no take backs,” she says.

Mayotte is asked about refinancing nearly every day, yet she’s only recommended it to a handful of borrowers. Even if you’re comfortably affording your monthly payments now, she says, would you be able to if you were laid off or hit with a medical emergency that upends your finances?

That’s why she typically only tells federal borrowers they may be a fit for refinancing if they have a very strong emergency fund--enough to cover at least one year's worth of expenses-- and a second earner in the household.

If You Have Private Student Loans

The decision here is much easier: Just do it.

“If you have private loans, you have no excuse not to check interest rates this week,” Hornsby says.

You’re not forfeiting any special protections, so you should simply be searching for the best loan terms you can get. Also keep in mind that you can refinance multiple times. If, for example, you refinanced private loans a few years ago, you should check what rates you can qualify for today, particularly if you’ve improved your credit score or gotten a raise at work.

If You Decide to Refinance

Once you decide to refinance, prepare yourself: Those exciting low rates you see advertised are reserved for the “cream of the crop” as Mayotte puts it. In addition to a low debt-to-income ratio, Mayotte says she typically sees the best rates offered to people who have two years of on-time payments under their belt. That’s not to say you won’t be able to qualify for a lower interest rate than you currently have, but that most people do not qualify for the lowest rate available.

Credible declined to share how many visitors to its website are turned down for refinancing, but General Manager Rob Humann says the rate of declines is down 13 percentage points since January 2018. When borrowers are declined, it's typically because their debt-to-income ratio is too high, Credible's data show.

Last year in a call with investors, KeyBank CEO Beth Mooney said about 70% of refinance customers at Laurel Road, which KeyBank recently acquired, were medical professionals. They earn average salaries of $185,000 and have an average FICO score of 760. (The national average is just over 700.) First Republic Bank, meanwhile, advertises rates that start at 1.5 percentage points below other companies. But to qualify for the lowest rate, you have to open a checking account with the bank and dump at least $10,000 into it.

Few lenders have that type of caveat for qualifying, but they all have slightly different underwriting rules and terms, and it's not uncommon for borrowers to be rejected by one lender and accepted by another. Most lenders, but not all, require you to have a degree, for example. Some non-profit state loan authorities offer the same fixed rates to all qualified applicants, and at least one—Rhode Island Student Loan Authority—offers an income-based payment plan for borrowers experiencing financial hardship.

Hornsby, of Student Loan Planner, says he has heard from borrowers recently who’ve been offered 5-year terms with fixed interest rates below 3%. A longer term of 10 years has yielded offers between 3% and 4%. (In general, the shorter the repayment term, the lower the interest rate.) Like any type of consumer loan, you should shop around to find for the best rate and repayment terms. Here's why: Data from mortgage lender Freddie Mac found getting even one additional quote saved homeowners on average $1,500 over the life of their original loan.

Unlike refinancing a mortgage, refinancing student loans should be relatively painless. None of the major players charge origination fees and you can apply online in a matter of minutes.

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