Student loan refinancing in 2022: How to do it, and what you should know first

It’s never been a better time to think about refinancing your student loans. With interest rates at record lows, refinancing can be a smart move for many student borrowers—assuming they’ve taken everything into consideration. There are currently more than 43 million people with student loan debt in the U.S., and borrowers carry an average balance of more than $39,351.

As a result, tens of millions of people stand to potentially save some money by refinancing their loans at lower interest rates—particularly with student loan payments resuming in February after a two-year freeze. Here’s what to keep in mind before shopping around for a new rate.

Important things to consider before refinancing your student loans in 2022

The first thing to know about refinancing your student loans in 2022 is that the timing is perfect in terms of interest rates. “Variable rates have nowhere to go but up,” says Mark Kantrowitz, a student loan expert who has written five books about scholarships and financial aid. “Borrowers may want to refinance because the interest rates are at or near historic lows. You can potentially get a lower rate, especially if your rates are much higher from a few years ago.”

Second, borrowers who were enjoying a brief holiday from making loan payments due to the pandemic should prepare to start paying once again. That’s because the Biden administration has confirmed that the pause will end at the end of January.

The third ball in the air is the prospect of some sort of student loan forgiveness action coming down from on high. The idea has been batted around by the Biden administration for some time, and it’s hard to say if any concrete legislation or executive actions are seriously on the table. From Kantrowitz’s perspective, any program that addresses loan forgiveness is likely to be limited in eligibility, and private student loans probably won’t be included in any potential measure. However, he adds, “if it does happen, it’ll happen sooner rather than later.”

Federal borrowers could give up some benefits and protections by refinancing their federal loans into private loans, and, potentially, any prospect for loan forgiveness. In short, federal loans have better benefits, but private loans tend to offer lower rates—so that presents borrowers with a choice.

Of course, if borrowers wait too long to potentially capitalize on lower rates, they could miss out, as the Federal Reserve has already signaled that interest rates are going up in 2022. If you plan to go ahead with a student loan refinance during 2022, here are the steps to take:

1. Research your options and shop around

The first thing to do if you plan on refinancing, or at least exploring your options, is to shop around for a new lender. While a new, lower interest rate may be top-of-mind for many people, it’s also smart to look at the fine print too.

“We recommend not just the interest rate, but compare all terms and conditions during any potential refinance—including fees,” says Barry Coleman, vice president of counseling and education programs at the National Foundation for Credit Counseling. “There may be pre-repayment penalties, too, when you refinance.”

There are plenty of websites and services that will compare rates and loan terms—Coleman cites SoFi, Credible, and CommonBond as some of the more popular ones—and says that shopping around is “the wise thing to do” as a first step.

2. Crunch the numbers, and make a decision

It’s important to note that refinance offers, and corresponding effective interest rates, will be based in large part on your credit. “Any loan offers to refinance will be based upon a borrower’s credit profile,” says Coleman. “Borrowers with the best credit scores will get the best refinance offers.”

Once you have a few attractive offers for refinancing, consider the interest rates and applicable fees, and then decide which one works best for you. And if you’re also wondering how refinancing your student loans may affect your taxes, there isn’t going to be much effect.

“A student loan is a personal loan and doesn’t qualify to be deducted,” says David Beck, a New York–based CPA. “There isn’t a tax benefit to refinancing a student loan.”

3. Submit the application and sign the dotted line

Once you decide to go through with the refinance, it’s all a matter of filling out the application and submitting it. When doing so, remember that you’ll probably need a swath of documents and information: A government-issued ID, your Social Security number, bank statements, and statements from your current student loan servicer.

Finally, double back to make sure you’re comfortable with all of the loan’s terms—interest rates, the repayment time frame, and any applicable fees. It never hurts to give everything a second look.

4. Wait for the process to complete, and start making payments to your new lender

The most important thing to do, Coleman says, following the submission of your application, is to sign the loan documents from your new lender—assuming you’re approved, of course. And secondly, you need to keep making payments to your old lender while everything is processed.

Assuming that everything is going to happen immediately can cause you to miss https://paydayloan4less.com/payday-loans-ca/ payments, potentially hurting your credit and resulting in late fees. You’ll eventually get the green light from your new lender, and then you can switch up your payments.

In practice, the process of refinancing your student loans isn’t overly cumbersome. The critical aspect is that you do some initial homework, and take into consideration that refinancing may have repercussions depending on the specifics of your loans.

However, if getting a lower rate and lowering your monthly payments is all that matters to you, now is probably the time to pull the trigger, says Kantrowitz.

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