A no-interest student loan is equivalent to winning a lottery but it is not free money. It entails paying the actual amount that was borrowed during the time of refund, unlike traditional student loans that are accompanied by their respective interest rates which could be fixed or variable. 

There was a shock on Sunday, 15th of March 2020 as the Federal Reserve made a proclamation that it would reduce interest rates to zero as part of the efforts to prevent the country from going into recession due to the recent coronavirus outbreak. This step also entails buying a minimum of $700 billion in government and mortgage-related bonds so as to ensure the stability of the market which seems to be dwindling as a result of the massive outbreak and reduction in borrowing costs. 

What Does Zero Percent (0%) FED Interest Rate Mean for Student Loans?

This development will surely have an effect on student loans. The reduction in the income generation of the U.S would also affect the interest rates on the student loans as the interest rate on the federal loans now becomes fixed over the life of the loan. 

Borrowers that are no longer in school or borrowers who are in repayment are exempted from this rate cut but it would greatly affect people who are already preparing to take the student loans towards the forthcoming session, 2020/2021 academic year. It means that those people that fall into this category will only receive rates of the lowest amount. 

Since 2013, the annual interest rates on the federal government student loans have always been set by a formula according to the sale of 10-year Treasury notes after the May auction. Perhaps the student loan interest rates are fixed today based on the recent 10-year treasury yields. 

The interest rate for undergraduate loans will be about 3% while the interest rate for graduate students and parents will be about 5.5%. In the current academic year, the student interest rate is about 4.53% for undergraduates and 7.08% for the graduates and parents including the borrowers. This will affect both the potential beneficiaries of undergraduate student loans and graduate students/parents loans.

So, when is the right time to refinance student loans? Well, the answer is simpler than you thought. If

  • Own a loan over 3%
  • Do not require the benefits of federal loans such as flexible repayment options or forgiveness
  • Acceptable credit 
  • A stable job and income 

Having put this in place, you will get a reduced rate whenever you refund the current loans. Taking the step of refinancing your loans is a good move towards saving a lot of money. You could refinance your student loans once you are certain that you would accumulate enough money as there is no advantage in refinancing your student loans when you would be reimbursing an increased interest. The stability of your finances is a determinant concerning the right time to refinance your student loans

Also, the right time to refinance one’s student loan is largely dependent on the borrower’s motivation and goals. Once a student loan is refinanced, there will be a switch of the current student loans for a new loan but the new loan will ultimately be accompanied by a lower interest rate. Thus, the situation determines largely the right time to refinance student loans

As a student, your knowledge about the current interest rate is also a significant factor in determining the right time to refinance your student loans. It will help you to strategize and plan ahead. This could be done by comparing the present interest rate with the number of offers that you get from various lenders.

Where Are Best Places to Refinance?

Being assured and clear about one’s goal of refinancing is the number one step. After this, you need to compare the borrower’s protections for the lenders. Perhaps they will be useful during times of sudden financial hardship. There is a need to select a fixed or variable interest rate, this is an individual decision that is based on your financial position and risk tolerance.

For borrowers who are currently repaying their loans, a lower rate could be gained by refinancing their loans into a private loan. There is always a possibility that the rates offered by the private lenders will be reduced by the Federal Government. 

It is also a great idea to posit that Chime, SoFi and Payoff are currently the best places to refinance. Make sure to shop around for the best rates and ensure each lender provide an estimate or quote before running your credit score. Placing a large number of credit checks can damage your credit score significantly in the short term. Instead, shop around with an estimate of your credit score and debt to income ratio to choose the right lender before having them run a full credit check and providing an offer.

The panic about a probable economic breakdown which made the US reduce the interest rates now gives student loan borrowers an opportunity to refinance their loans to a lower interest rate. This is all due to the fear of coronavirus pandemic which led to reduced interest rates. This period will be an opportunity for student loan borrowers to reduce their monthly payment, look for a more reduced interest rate, consolidate debt, accelerate repayment of their principle, and reduce the costs of borrowing.