A sharp drop in ­interest rates this year means that students and parents can reduce monthly payments and save thousands of dollars by refinancing education loans.

Important: Private and federal loans can be refinanced only through private lenders. You cannot take out a new federal student loan at today’s lower interest rates in order to pay off older ones. However, fixed rates on ­private loans have fallen to a recent 3.2% annual percentage rate (APR). That’s lower than rates on most federal loans have been over the past 15 years. To refinance any education loan…

To qualify, you typically need proof of steady income and a credit score of at least 650—otherwise the loan will require a cosigner. If you have multiple student loans, you can consolidate all of them into a single loan. 

Apply to multiple lenders. You don’t pay any application fee…and rates and repayment terms can vary among different lenders. In addition to banks and credit unions, check third-party comparison sites such as Credible.com, which allows you to fill out one form and compare rates from up to 10 private lenders.

Stick with a fixed-rate loan. Although variable-rate loans are available with APRs recently as low as 1.99%, they’re appropriate only for borrowers who plan to pay off their loans within the next year or two, when rates could start to rise. 

Consider factors beyond interest rates. For example, some lenders have more flexible term lengths—from five to 20 years—a major determinant of how much your monthly payments will be. If you need a cosigner, some lenders will let the cosigner be released from responsibility once you meet certain criteria such as 36 months of on-time payments. 

If you have a federal loan…

Hold off refinancing if you’re having financial difficulties. Reason: In response to the pandemic crisis, monthly payments and interest accrual on most federal education loans are suspended until after September 30, 2020, but not on private loans. This will give you a little extra time to delay payments.

Consider not refinancing at all. Unlike private loans, many federal loans offer more flexibility if you expect to have trouble paying back your loans…

For federal loans taken by students: Income-driven repayment plans let you reset your monthly payment to a more affordable amount based on your income and family size…and public-service loan forgiveness allows the remaining balance of your loans to be dismissed after a certain period of time if you work in a low-paying public-service job.

For loans taken by students and parents: Forbearance and deferment let you postpone and reduce principal and/or interest payments if you and your parents have economic hardships. 

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