Why It’s a Good Idea to Refinance Your Student Loans Now?
The Federal Reserve’s main priority is to keep the economy stable. When the economy spikes upward, so does inflation, with asset bubbles threatening the stability of our economy. This is exactly what we’re seeing right now – and why The Federal Reserve has recently raised its interest rates, with experts predicting 4-6 more increases before the end of 2022.
Initially, the Covid-19 pandemic forced the economy into a sharp recession. The Federal Reserve responded by quickly slashing interest rates to revitalize the economy. While the tactic worked, we’re now facing high inflation and unemployment rates. As of November, consumer prices are up 6.9% compared to a year prior, which is the fastest increase since 1982.
Federal Reserve officials estimate that our high inflation levels will continue through 2024, although they should moderate down throughout 2022. Experts believed that inflation would subside post-pandemic, but new variants, in addition to supply pressures and a limited workforce, have only made things worse.
To combat inflation, The Federal Reserve will continue to increase interest rates. Although there was discussion of 3 increases originally, recent predictions show that it’s likely there will be 4-6 increases in total. While this will impact the entire economy, it will have major impacts on the loan industry. The first increase occurred in March, but we still have time to act before the next ones.
What Happens When the Federal Reserve Raises Its Interest Rates?
The Federal Reserve has the ability to raise or lower the federal funds target rate. This is the rate that big commercial banks reference when setting their own interest rates. It can also impact various market rates as well as the global economy.
When the Federal Reserve raises the federal funds target rate, its goal is to increase the cost of credit by increasing loan interest rates. With higher interest rates, everyone will spend more on interest payments – both businesses and consumers. While this does take money out of our pockets, it also serves as a means to stabilize the economy.
People who are looking to finance projects may postpone them due to higher monthly payments and overall cost. Savings interest rates (annual percentage yield, or APY) also increase, so people are more encouraged to save money. All of these factors reduce the supply of money in circulation, which can lower inflation and cool off the economy.
How Will This Affect Your Student Loans?
If you have existing student loans with a fixed interest rate, they will remain locked in at your current rate. That’s because a fixed interest rate guarantees the same rate throughout the life of the loan. This applies to both private and federal fixed interest rate loans.
It’s worth noting that most federal student loans have a fixed rate. However, if you have federal student loans from before July 1st, 2006, you might have a variable interest rate.
Variable interest rate student loans, whether private or federal, can increase or decrease with the market. When the Federal Reserve increases interest rates, your loan’s variable interest rate will increase, too. Since there are 4-6 increases planned in the coming year, you can expect to see an aligning increase with each adjustment.
Why You Should Refinance Your Student Loans Today
Normally, you might refinance for organizational reasons, like releasing a cosigner or consolidating multiple loans. You might also refinance to save money – either by switching from a variable rate to a fixed rate or by locking in a lower interest rate and lowering your monthly payments overall.
The entire loan industry is experiencing record low interest rates. We can say the same for student loan refinancing, which has a very competitive market. Since additional interest rate increases are right around the corner, now is the time to refinance to save money.
If you have a fixed-rate loan, you can likely get a lower fixed interest rate which would lower your monthly payments. This will save you money on interest over the life of the loan. It’s also worth considering refinancing variable-rate loans into fixed-rate loans to avoid increasing rates. Refinancing now could ensure a stable monthly payment.
For example, let’s say you have a $25,000 student loan with a fixed interest rate of 5% and a 10-year repayment term. At this rate, your monthly payment is $265. If you refinance with Credible, which currently has student loan refinancing fixed rates as low as 2.15%, your monthly payment would drop to $232. That might not seem like a lot, but you’d save $3,960 in interest over the life of the loan.
The Best Lenders for Student Loan Refinancing
With Credible, you can prequalify with up to 13 lenders, including well-known companies like Citizens Bank and CommonBond, without impacting your credit score. Then, you can compare all of your offers side by side. Unlike with other marketplaces, Credible gives you the actual rates you qualify for – not an estimate.
There’s no loan limit, so you can refinance your entire student debt. Plus, Credible has a Best Rate Guarantee. If you find a better student loan refinancing rate elsewhere, Credible gives you $200. Credible even allows you to refinance with a cosigner if your income or credit score is impacting your ability to qualify.
Splash Financial allows you to refinance as little as $5,000 in student loans. It doesn’t charge any application, origination, or prepayment fees, unlike some marketplaces. This lender offers unique refinance options, like refinancing jointly with your spouse. If you’re a parent and your child has earned their degree, you could refinance student loans in your name or your child’s name.
While most lenders require a good credit score of over 700 for student loan refinancing, you could get a loan from Earnest with a credit score of just 650. This lender also gives you the option to customize your loan term and choose your monthly payment based on your budget. Plus, you can opt for biweekly or monthly payments and skip one payment every 12 months.
The Bottom Line
While we have enjoyed low-interest rates for several years, the Federal Reserve has made it clear that rates will continue to rise. Although this will ultimately stabilize our economy, it also means that the window of opportunity to cash in on low rates is ending.
Even if you don’t have ideal credit, it’s worth checking what rates you prequalify for, as this doesn’t impact your credit score. Credible makes it easy to check your rates with multiple lenders and refinance quickly. Doing so could save you thousands of dollars over your loan term.