Is Now the Right Time to Refinance Your Student Loans?

By: Brian Walsh · October 24, 2022 · Reading Time: 7 minutes

Editor's Note: Since the writing of this article, the federal student loan payment pause has been extended into 2023 as the Supreme Court decides whether the Biden-Harris Administration’s Student Debt Relief Program can proceed. The U.S. Department of Education announced loan repayments may resume as late as 60 days after June 30, 2023.

With interest rates rising and the freeze on federal student loan payments set to expire at the end of the year, now might seem like a good time to refinance your federal student loans.

But maybe you’ve been in a holding pattern for so long (the payment pause will have lasted for nearly three years when it ends), you just can’t bring yourself to make a change.

Or maybe you’re thinking you might as well enjoy the last two months of the payment holiday — or if you qualify for student debt forgiveness, you ought to wait until the $10,000 or $20,000 is actually deducted from your balance.

Of course, only you can know if and when it seems right for you to refinance. But to help you screen out the noise so you can hear the signal, here are some key considerations to think about.

6 Questions to Ask Yourself Before Refinancing

If you’re just not sure when to refinance your student loans, reframing the factors you are weighing can help. Answering these questions may give you the clarity and confidence you need to move forward with refinancing — or to hold off some more.

1. Does it seem like inflation is getting better or worse?

Interest rates have been on the rise since the Federal Reserve began trying to tamp down inflation. It does this by raising its key interest rate, which is not the same as student loan refi rates but is linked to them. The Fed started with a 0.25% to 0.50% hike in March, and has since bumped up its rate another four times, lifting it from less than 0.10% in March to 3.00%-3.25% in September.

So if inflation shows no sign of abating (it was still over 8% in September while the Fed’s target rate is around 2%), the Fed has said it will continue to raise its rates. And if rates continue to trend up, it may make sense to refinance now, before they go any higher.

2. Is or could your income become unstable?

Refinancing federal student loans into a new private student loan means giving up certain federal benefits and protections, including the option to defer payments on those loans or to apply for income-driven repayment. (Last summer, the Biden administration announced a new income-driven repayment option that caps payments on undergraduate loans at 5% and graduate school loans at 10% of discretionary income, covers unpaid interest, and forgives the balance after either 10 year if the balance is less than $12K and 20 years if the balance is more).

So if job security is a concern, you should take into account that private student loan lenders aren’t required to offer forbearance or special payment plans when the borrower is in financial straits. And if that’s the case, now may not be the right time to refinance.

That said, there are lenders, such as SoFi who offer unemployment protection, which allows those eligible to temporarily pause payments on their loans if they lose their job. (Speaking of SoFi benefits, we also offer one-on-one career coaching in areas like interview techniques, networking, and negotiation to all SoFi members.)

3. Do you have a high balance?

When your balance is high (say, five figures or more), the savings from a lower rate are amplified. In fact, depending on your balance, the difference between your old and new interest rates, and other factors, the long-term savings from refinancing could outweigh the short-term savings from not paying the government interest for the remaining months of the payment pause.

For a very simplified example, say you have a graduate federal student loan for $100,000, with a 6% fixed interest rate, you do not qualify for one-time forgiveness, you’re enrolled in the Standard Repayment Plan of 10 years (120 months), and you are to start making monthly payments of about $1,110 in the new year. Over the life of the loan, you would pay a total of about $33,225 in interest.

But if you were eligible to refinance your student loan now to a fixed rate of 3.74%, your monthly payments could drop to about $1,000 — and over 10 years, the total interest you would have paid is about $20,017. Of course, refinancing now could mean making payments when federally held student loan payments are on pause and the interest rate for them is 0%.

Also, this example assumes fixed rates and does not take into account any refinancing fees or finance charges. Additionally, your situation will be different if you have been making payments (before and throughout the forbearance period starting March 2020).

Recommended: Student Loan Refinancing Calculator

4. Would your rate be lower if you refinanced?

Some people may refinance to get a longer loan term — and so reduce their monthly payments (but likely pay more interest over the life of the loan). But most people are primarily looking for a lower interest rate than their current one.

So if your federal interest rate is generally lower than 4.0%, now is likely not the right time for you to refinance. Specifically, that means any Direct Subsidized or Unsubsidized Loans that were disbursed between July 1, 2020, and June 30, 2022, to undergraduate borrowers. The 2.75% or 3.73% they received from the government is mostly lower than current interest rates. Same goes for Direct loans disbursed to undergraduate borrowers from 2011-2013, 2013-2014, and 2016-17 (carrying 3.40%, 3.86%, and 3.76% interest rates).

But for other years and for graduate, professional, and parent borrowers, current loan rates (coming off of historic lows) can be better than the borrowers’ federal loans rates, depending on such factors as credit score, credit history, and debt-to-income ratio.

5. Are you seeking Public Service Loan Forgiveness?

Borrowers may want to rethink refinancing federal student loans if they’re hoping to qualify for Public Service Loan Forgiveness (PSLF). They’ll need to keep their loans with their federal student loan servicer and make the required number of on-time payments to maintain their eligibility.

Additionally, the Department of Education has proposed changes that will allow payments that weren’t allowed to qualify for PSLF, such as partial or late payments, to count. This could mean that you are closer to forgiveness than you previously thought.

Recommended: 4 Student Loan Repayment Options — and How to Choose the Right One for You

6. Finally, if you are waiting for Biden’s one-time forgiveness of $10,000 or $20,000 before refinancing, do you really need to wait?

It is possible to refinance only a portion of your federal student debt — there is no requirement to refinance the whole balance. So if you are worried that refinancing now will cause you to lose out on your one-time forgiveness of $10,000 or $20,000, you needn’t be. You can leave the amount you expect to be forgiven as your federal student loan, and refi only what exceeds it.

But if you just want to make sure that $10,000 or $20,000 is removed from your debt before you refinance, applying for forgiveness before Nov. 15 will increase the chances that your forgiveness will be processed before the end of the year.

The Takeaway

If you’re in a quandary about refinancing your federal student loans, you’ve probably been in a holding pattern for awhile. For two and a half years, the government has not collected student loan payments. But now that payments are set to resume in about two months, interest rates that were at historic lows are climbing.

Should you refinance now? Only you can decide, but factors worth considering include what your interest rate would be, if you think that rate could jump up or down, and if you are ready to give up the benefits that come with federal student loans, including forbearance and income-based repayment plans.

Not sure what interest rate you would qualify for? SoFi can help with that — and fast. It takes just two minutes to get your rate. Additionally, what you see is what the loan will cost. We don’t believe in application or origination fees — or prepayment penalties for that matter!

Refi with SoFi today to get flexible terms and a competitive low rate before interest rates rise even higher!

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If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended to December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit. CLICK HERE for more information.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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