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Last week, the average interest rate on refinanced student loans increased. Despite the rise, rates still remain relatively low, providing borrowers with an opportunity to refinance at a lower rate.
According to Credible.com, from June 13 to June 17, the average fixed interest rate on a 10-year refinance loan was 5.31%. It was 3.27% on a five-year variable-rate loan. That’s for borrowers with a credit score of 720 or higher who prequalified on Credible.com’s student loan marketplace.
Related: Best Student Loan Refinance Lenders
The average fixed rate on 10-year refinance loans last week jumped by 0.17% to 5.31%. The week prior, the average stood at 5.14%.
Because fixed interest rates don’t change throughout a borrower’s loan term, it’s possible to lock in a rate that’s considerably lower than you would have received at this time last year. The average fixed rate on a 10-year refinance loan at this time last year was 3.50%, or 1.81% lower than today’s rate.
Let’s say you refinanced $20,000 in student loans at today’s average fixed rate. You’d pay around $215 per month and approximately $5,821 in total interest over 10 years, according to Forbes Advisor’s student loan calculator.
The average rate on five-year variable student refinance loans moved up by 0.33% last week. Now it sits at 3.27%.
Variable interest rates fluctuate during a loan term according to the index they’re tied to and market conditions. Many refinance lenders recalculate rates monthly for borrowers with variable-rate loans, but they typically limit how high the rate can go—lenders may set a limit of 18%, for instance.
If you were to refinance an existing $20,000 loan to a five-year loan at a variable interest rate of 3.27%, you’d pay approximately $362 on average per month. In total interest over the life of the loan, you’d pay around $1,707. Of course, since the interest rate is variable, it could fluctuate up or down from month to month.
Related: Should You Refinance Student Loans?
The Right Time To Refinance Student Loans
Most lenders require borrowers to complete their degree before refinancing—though not all—so in most cases, wait to refinance until you’ve graduated. You’ll also need a good or excellent credit score and stable income in order to access the lowest interest rates.
If you don’t yet have strong enough credit or income to qualify, you can either wait and refinance later or use a co-signer. The co-signer you choose should be aware that they’ll be responsible for making student loan payments if you no longer can and that the loan will appear on their credit report.
Before you choose to refinance, calculate your potential savings. It’s important to make sure you’ll save enough to justify refinancing. Shop at multiple lenders for rates and take your credit score into consideration when shopping around. Keep in mind that those with the highest credit scores receive the lowest rates.
What To Consider When Comparing Student Loan Refinancing Rates
One big goal of refinancing student loans, for many borrowers, is reducing the amount of interest paid. And that means getting the lowest possible interest rate.
You may find that variable-rate loans start out lower than fixed-rate loans. But because they’re variable, they have the potential to rise in the future.
Fortunately, you can reduce your risk by paying off your new refinance loan quickly, or at least as quickly as possible. Start by picking a loan term that’s short but with a payment that’s manageable. Then, pay extra whenever you can. This can hedge your risk against potential rate increases.
Refinancing Student Loans: What Else to Consider
One big caveat when refinancing federal student loans to private student loans is that you’ll lose many federal loan benefits, like income-driven repayment plans and generous deferment and forbearance options.
You may not need these programs if you have stable income and you plan to quickly pay off your loan. But make sure you won’t need these programs if you’re thinking about refinancing federal student loans.
If you do need the benefits of those programs, you could refinance only your private loans or just a portion of your federal loans.