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Last week, the average interest rate on refinanced student loans moved up. Yet for many borrowers, it could still be a good time to refinance. Rates are still relatively low.
For borrowers with a credit score of 720 or higher who prequalified on Credible.com’s student loan marketplace from May 9 to May 13, the average fixed interest rate on a 10-year refinance loan was 4.91%. On a five-year variable-rate loan, the rate was 3.94%, according to Credible.com.
Related: Best Student Loan Refinance Lenders
The average fixed rate on 10-year refinance loans last week increased by 0.28% to 4.91%. The week prior, the average stood at 4.63%.
Fixed interest rates won’t fluctuate throughout a borrower’s loan term. That allows borrowers refinancing now to lock in a rate much lower than they would have received this time last year. At this time last year, the average fixed rate on a 10-year refinance loan was 3.59%, 1.32% lower than today’s rate.
A borrower who refinances $20,000 in student loans to today’s average fixed rate would pay around $211 per month and approximately $5,350 in total interest over 10 years, according to Forbes Advisor’s student loan calculator.
Average variable rates on five-year refinance loans moved up last week, from 3.04% on average to 3.94%.
In contrast to fixed rates, variable interest rates fluctuate over the course of a loan term according to market conditions and the index they’re tied to. Many refinance lenders recalculate rates monthly for borrowers with variable-rate loans, but they typically limit how high the rate can go—to 18%, for instance.
If you were to refinance an existing $20,000 loan to a five-year loan at a variable interest rate of 3.94%, you’d pay approximately $368 on average per month. In total interest over the life of the loan, you’d pay around $2,067. Of course, since the interest rate is variable, it could fluctuate up or down from month to month.
Related: Should You Refinance Student Loans?
When to Refinance Student Loans
Lenders generally require you to complete your degree before refinancing. Though it’s possible to find a lender without this requirement, in most cases, you’ll want to wait to refinance until after you’ve graduated.
Keep in mind that to get the lowest interest rates, you’ll need a good or excellent credit score.
If your credit is poor or your income isn’t high enough to qualify, you have a couple of options. You can wait to refinance until you’ve built credit or you have enough income. Or, you can get a co-signer. Just make sure that the co-signer knows that if you can’t make student loan payments, they’ll be responsible. The loan will appear on their credit report.
Finally, make sure you can save enough money to justify refinancing. At today’s rates, most borrowers with high credit scores can benefit from refinancing. But those with less-than-great credit who won’t receive the lowest fixed or variable interest rates may not. Start by exploring rates you could prequalify for via multiple lenders, then calculate your potential savings.
Refinancing Federal Loans to Private Loans
There are a few things to keep in mind when refinancing a federal student loan into a private student loan. To begin, you’ll lose access to some benefits that federal student loans offer. For instance, you’ll no longer have access to income-driven repayment plans or deferment and forbearance options.
You may not need these programs if you have a stable income and plan to pay off your loan quickly. 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.
Getting The Best Rates
For most borrowers, the biggest motivation to refinance student loans is to reduce the amount of interest they’ll pay. That means choosing the lowest possible interest rate is a top priority.
Variable rates typically start low, but they could rise in the future, making them a gamble. But one way to limit your risk exposure is to pay off your new refinance loan as fast as possible. Choose as short a loan term as you can manage, and pay extra when possible so that you’re not subject to potential rate increases in the future.
When considering your options, compare rates across multiple student loan refinancing lenders to ensure you’re not missing out on possible savings. Explore whether you qualify for additional interest rate discounts, potentially by choosing automatic payments or by having an existing financial account with a lender.