Refinancing Student Loans

Should you be concerned about rising interest rates?

Student loan debt is a growing problem across the United States. Today, many college students graduate with tens of thousands of dollars in student debt – a trend that has become all too common.

For borrowers with the proper credentials, refinancing student loans offers a potential solution on the road to repayment. In an ideal scenario, a borrower could obtain a lower interest rate on their collective student debt. With a lower rate and timely payments, they stand to save money – if they can get a lower rate.

While refinancing can help a borrower by securing a lower rate, this is only helpful if interest rates are low overall. Starting in March 2017, the Federal Reserve began hiking interest rates in what would become a series of changes. With interest rates continuing to rise, many borrowers may want to question whether it makes financial sense to refinance their student loans.

Where are interest rates heading?

According to the records from the Fed, the first interest rate hike happened in March 2017, raising the interest rate from .75 percent to 1 percent. A series of increases followed, the last this past June when the federal funds rate was raised to 2 percent.

Economic experts predict that the Fed will raise interest rates two more times. The next meeting was held on September 25-26, 2018, to determine whether to raise the short-term interest rate.

Rising interest rates are a sign of a healthy economy as it is a generally a sign of economic recovery. While it is a boon for anyone saving money, it can present difficulty for borrowers looking for a rate reduction. In a high-rate environment, it becomes more expensive to borrow money. Student loan refinance rates are no exception.

How will the rate environment impact refinancing student loans?

If you have student loan debt, rising interest rates may present challenges in general, particularly if you have a variable-rate loan or want to refinance.

A higher-rate environment pushed lenders to push up rates for low-end offerings on their loan products. In other words, the potential for a super-low interest rate is reduced. This means the maximum savings value of a refinance loan has gone down, as well.

Summing it up

What does this mean for borrowers? Given how rates are increasing, student loan borrowers may be less likely to refinance. But on the other hand, there may also be an incentive to refinance sooner rather than later to take advantage of the rate environment. Borrowers who are stuck with loans from about a decade ago may fit into this category; rates were much higher back then. Additionally, borrowers with variable-rate loans may actually be incentivized to refinance to a fixed rate before their interest rates increase.

What does this mean for the industry? The industry might experience a downturn in business, but it certainly won’t disappear. While borrowers who took out low-rate loans over the last five years are certainly less likely to refinance, there are still borrowers paying off high-rate loans from a decade ago who may be able to benefit from refinancing. Additionally, as rates are rising this year, they may yet decline in the future and open the door to better refinancing opportunities. Refinancing will always be an option as rates change.

That being said, the June 2018 projections from the Fed show that interest rates will continue to rise through 2020. One can assume that it will become less economical to refinance as these rates increase. However, this shouldn’t be taken as a blanket assumption. Borrowers may still benefit from securing a fixed-rate loan or restructuring a repayment term.

What does it all mean?

Interest rate hikes should concern anyone with student loan debt, but those with a variable rate student loan may be most concerned. For anyone in that position, refinancing will likely make good financial sense, particularly if you can get a lower fixed interest rate.

Although rising interest rates are a good thing for our economy, they can translate into more expense for those in debt or who want to take out a loan. If you have student loans, consider whether refinancing now makes sense based on your present situation and the possibility that your loans will become more expensive as the interest rate rises.

Greater Alliance Credit Union offers competitive student loan refinance rates. Ask us about how to refinance student loans by visiting our student loans page, calling (888) 549-9050 or emailing customer.care@custudentloans.org.