The three-and-a-half-year repayment and interest pause on federal student loans is officially over. Interest started accumulating on Sept. 1, and most federal student loan borrowers will have a payment due at some point in October.
There are several private companies that offer student loan refinancing, and some might offer better interest rates than you're paying on your federal student loans -- even in the relatively high-interest environment we're in. But before you seriously consider refinancing your student loans, here are a few things about student loan interest rates you need to keep in mind.
The difference between APR and interest rates
This isn't just important for student loans but is an important financial concept to understand for all adults. When you're buying a house for example, the difference between APR and interest rates is very important when applying for a mortgage.
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Here's the basic idea. Interest rate refers to the finance charge you'll pay as a percentage of your loan on an annualized basis. If you owe $1,000 at a 6% interest rate, your interest will accrue at an annualized rate of $60.
On the other hand, APR (which stands for annual percentage rate) is more reflective of the total cost of borrowing. In addition to the interest rate, APR includes certain fees and expenses associated with obtaining a loan.
For our purposes, the point is that a 5.99% APR and a 5.99% interest rate can be two very different things when you're looking to refinance your student loans.
Interest rates aren't always the only cost
This is closely related to the last point, but it's important to mention that interest rates aren't always the only cost of student loan refinancing. This is especially true if your credit score isn't top-notch.
Specifically, many private student loan refinancing companies charge origination fees to some or all borrowers. Usually an origination fee is rolled into the loan itself. For example, a $30,000 student loan refinancing with a $500 origination fee would have a $30,500 initial balance. Again, origination fees should be reflected in APR calculations, but are not reflected in interest rates. So, if your student loans currently have an average interest rate of 6% and you can refinance with a 5.5% interest rate but with an origination fee, it might not be a money-saving deal after all.
A lower interest rate might not be worth giving up federal student loan benefits
For millions of borrowers, refinancing their federal student loans with a private lender doesn't make good financial sense -- and interest rates have nothing to do with it.
In a nutshell, federal student loans have some pretty valuable benefits that some borrowers shouldn't give up. For example, federal student loans are eligible for income-driven repayment plans, as well as loan forgiveness programs like Public Service Loan Forgiveness. If you refinance into a private loan, you won't be eligible, even though your loans started out as federal loans.
There's no harm in checking your interest rates
Most private student loan refinancing companies will allow prospective customers to check their interest rates without a hard credit check, meaning that it will have no impact to your credit score. So, if you're curious, there's no harm in checking what interest rates you could get on a student loan refinancing.
The bottom line on student loan refinancing and interest rates
By knowing all of these things about interest rates and related concepts, you'll be in a better position to make smart decisions about your own student loans. Refinancing is not the best move for everyone. In fact, the majority of federal student loan borrowers are probably better off not refinancing, even if they get a slightly lower interest rate. But there's no harm whatsoever in exploring your options, and now you'll have a much better idea of what you're looking at.
