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Why refinance private student loans, according to a financial planner

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Anna N’Jie-Konte, a financial planner and founder of Dare To Dream Financial Planning, feels there’s one thing that people are overlooking right now: student loan financing.

“Because interest rates are so low, folks that have private student loans may be doing themselves as a disservice if they don’t look at refinancing,” she told Business Insider. 

Across the board, costs to borrow have been falling thanks to rate cuts made by the Federal Reserve, from home equity loan interest rates to auto loan interest rates. Interest rates on private student loans — student loans from a bank or online lender rather than the federal government — are no different. Often, these loans have higher interest rates than federal student loans. And, anyone who took out private student loans several years ago when interest rates were high may see the rates available today are lower than the interest rates their loans carry now.

“I spoke to someone the other day who had a 12% rate on her private student loans,” N’Jie-Konte said. “There are lenders out there offering interest rates between 4% and 7%.”

According to data from LendEDU, the average interest rate for a private student loan was 9.66% in 2017, falling to an average of 8.49% in 2019. Since the onset of the coronavirus, interest rates have dropped even further throughout 2020.

If you’re considering refinancing your student loan, make sure to get quotes from multiple lenders to figure out which one will most benefit you.

Student loan refinancing isn’t right in every situation

There are some situations where saving a few percentage points on your interest rate won’t be of much help. 

For one thing, it may not be helpful if your credit score has decreased significantly. In general, the lower your credit score, the more interest you’ll pay on a loan, including refinancing. It’s important to check your credit score before considering refinancing. 

N’Jie-Konte says that people should also consider how long they have left on their student loans before deciding that refinancing is for them. She warns against “extending your term further than what’s already remaining,” and adding more years to your loans.

If you can refinance for the same term, or a similar one, then you might want to consider it. “Let’s say you have eight years left on your student loans,” she said. “If you can find a lender that is going to cut your interest rate and keep the loan term similar at seven or eight years, I think it really behooves you to look at that.”

Federal loan borrowers might not find much benefit in refinancing right now, either. To refinance a federal loan, you must convert it from public to private. Currently, federal student loan borrowers have the benefit of suspended interest rates and payments until September 30, 2020 due to the coronavirus pandemic. While private loan borrowers facing financial hardships during the pandemic could receive some protections from their lenders, the protections usually aren’t as generous.

Additionally, federal borrowers could lose protections by refinancing with a private student loan. Federal student loans typically come with options like income-driven repayment plans and even debt forgiveness that private lenders don’t offer. In some cases, borrowers could benefit more from those programs more than they could by refinancing. 

Federal student loan borrowers and anyone who’s had a change in credit score may not see big incentives to refinance right now. But, N’Jie-Konte says that there’s good reason for anyone else with a private student loan to look into refinancing. “At the end of the day, if you can shave 5% off your interest rate,” she said, “that’s just incredible.”

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