Is Now a Good Time to Refinance Your Student Loans?
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Here's your money briefing for Thursday, October 5th. I'm J.R. Whelan for The Wall Street Journal. For many student loan borrowers, the resumption of payments this month couldn't come at a worse time. The prices of food, rent and gas are significantly higher than when payments were paused three years ago. To help make their loans more manageable, borrowers might look to refinancing as an option.
You can either change the rate on your loan, hopefully to make it lower, or you can change the term of that loan, which means that if you would prefer to make smaller monthly payments over a longer period of time, you can choose to do that.
But is refinancing a smart move in the current economy? Wall Street Journal economics reporter Gabe Rubin is here to discuss after the break.
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Student loan borrowers who've resumed making payments might be considering refinancing, but does it make financial sense? Wall Street Journal economics reporter Gabe Rubin joins me. So, Gabe, what does refinancing allow student loan borrowers to do?
So in a general sense, refinancing allows a student loan borrower or really any other type of borrower to do two possible things.
What immediate financial pressures are borrowers facing as student-loan payments resume?
You can either change the rate on your loan, hopefully to make it lower, or you can change the term of that loan, which means that if you would prefer to make smaller monthly payments over a longer period of time, you can choose to do that.
So let's say somebody has a payment plan through a federal student loan program and they decide to refinance. What happens to their loan?
So you're effectively removing that loan or those loans from the federal system. So what you have to do is consolidate all of your loans into a single loan, which then gets removed from the federal system. And what that does is it produces a blended interest rate. So that's basically a mathematical formula that combines the rates of your various loans that you might have. You might have multiple student loans and it goes into one and you get a single rate. And after that, you can choose to refinance it and get a lower rate or change the term. What that does, though, is it opens up a couple of risks. And those risks include that by being out of the federal system, you're no longer able to get that loan forgiven in a case of mass debt forgiveness.
And also, it's not eligible for many of these debt repayment programs that the government offers, including the new save or saving on a valuable education plan that could really lower someone's monthly payments. There are a lot of risks involved in consolidating and refinancing.
Oh, so there is a trade-off here.
Definitely a trade-off, and it doesn't make sense for lots of borrowers.
So why do financial experts say that now is not a good time for borrowers to consider refinancing?
Yeah, so this doesn't apply completely across the board. There are exceptions, but for most borrowers, especially those with undergraduate loans, it really doesn't make sense right now for those people to refinance because we're in a high interest rate environment.
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