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Last week, the average interest rate on refinanced student loans remained the same. Rates remain low enough that many borrowers justify refinancing their student loans.
The average fixed interest rate on a 10-year refinance loan was 3.65% from July 5 to 9. This is for borrowers with a credit score of 720 or higher who have prequalified on Credible.com’s student loan market. The average interest rate on a five-year variable rate loan was 3.05% among the same population, according to Credible.com.
RELATED: Best Student Loan Refinance Lenders
Fixed rate loans
The average fixed rate on 10-year refinance loans last week was 3.65%, similar to the week before.
Fixed interest rates remain the same for the duration of a borrower’s loan. This allows borrowers who are refinancing now to lock in at a much lower rate than they would have received at this time last year. At the same time last year, the average fixed rate on a 10-year refinance loan was 4.32%, 0.67% higher than the current rate.
A borrower who refinances $ 20,000 in student loans at the current average fixed rate would pay about $ 199 per month and about $ 3,902 in total over 10 years, according to the Forbes Advisor student loan calculator.
Variable rate loans
The average variable rate on a five-year refinance loan jumped last week. It fell to 3.05% from 3.04% the week before.
Unlike fixed rates, variable interest rates fluctuate over the life of a loan depending on market conditions and the index to which they are linked. Many refinance lenders recalculate the rates every month for borrowers with variable rate loans, but they usually limit the rate up to 18%, for example.
Refinancing an existing loan of $ 20,000 into a five-year loan at an interest rate of 3.05% would result in a monthly payment of approximately $ 360. A borrower would pay $ 1,589 in total interest over the life of the loan. But because the rate in this example is variable, it may go up or down from month to month during this time period.
RELATED: Should You Refinance Student Loans?
Fixed rate loans vs variable rate loans
For most borrowers, the primary motivation for refinancing student loans is to reduce the amount of interest they will pay. This means that choosing the lowest possible interest rate is a top priority.
You may find that variable rate loans are initially lower than fixed rate loans. But because they are variable, they have the potential to increase 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 choosing a short loan term but with a manageable payment. Then pay extra whenever you can. This can hedge your risk against possible rate increases.
When considering your options, compare the rates of several student loan refinance lenders to make sure you don’t run out of potential savings. Find out if you qualify for additional interest rate reductions, possibly by choosing automatic payments or by having an existing financial account with a lender.
When Should You Refinance Student Loans?
Most lenders require borrowers to graduate before refinancing, but not all, so in most cases, wait to refinance until you graduate. You will also need a good or excellent credit score and a stable income in order to access the lowest interest rates.
If you don’t yet have enough credit or income to qualify, you can either wait and refinance later or go with a co-signer. The co-signer you choose should know that they will be responsible for making student loan payments if you can’t anymore, and that the loan will show up 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 not very good credit and who will not receive the lowest fixed or variable interest rates may not be. First, explore the rates at which you could prequalify through multiple lenders, then calculate your potential savings.
Other features of student loan refinancing to consider
A big problem with refinancing federal student loans for private student loans is that you will lose many of the benefits of federal loans, such as income-based repayment plans and generous deferral 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 need the benefits of these programs, you can refinance only your private loans or only a portion of your federal loans.
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