Refinancing student loans can save at least some creditworthy borrowers thousands of dollars on interest payments. Alas, the window for such big savings from education debt refinancing might be rapidly closing, according to evidence from a new study by student loan tracking company LendKey.
The average savings for student loan refinancers with top credit scores so far in 2017 was about 2.2 percentage points off annual interest — down from an average savings of more than 3 percentage points in 2014 and 2015, LendKey found. That window may continue to close more — one reason why some of the larger refinancers like SoFi have started to expand into other types of lending, like personal loans, as the Wall Street Journal points out.
There are two major reasons why the cash you can squeeze out from student loan refinancing is shrinking. For one, there's the Federal Reserve's recent interest rate hike: In an environment of rising short-term rates, you can't save as much money by seeking out a new lender.
But there's another factor, most relevant to recent and soon-to-be graduates: Federal education loan rates have also come down a lot in recent years. Before a program adopted under President Barack Obama — by which federal student loan rates are pegged to 10-year Treasury bond auction rates — Congress was in charge of setting the rates, which were especially high through the 1990s and early aughts.
Thanks to the switch, approved in 2013, federal loan rates are now far lower, another reason borrowers may save less from refinancing.
So what does that mean for you? Even in the first place, the five-figure savings advertised by refinancers were a bit misleading — as they would be most typical for a specific type of borrower: e.g., one with six-figure debt and high earnings like doctors and lawyers.
But if you are looking to save money, trying to refinance now could still be worth it if you act quickly: For more average borrowers, your savings could be around $5,000 over a decade.
While the biggest savings will obviously go to people with the highest credit scores and incomes, some borrowers with credit scores as low as 560 have been approved for refinancing in the past. You also might be able to secure a lower rate with a co-signer, as about a third of refinancers do.
A major caveat to bear in mind: Refinancing from federal to private loans also involves giving up protections afforded to borrowers of federal student loans, like the ability to enroll in income-based repayment plans. So weigh your options carefully before deciding.
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