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Last week, the average interest rate on refinanced student loans jumped. For many borrowers, rates remain low enough to make refinancing a good option.
For borrowers with a credit score of 720 or higher who prequalified on Credible.com’s student loan market October 25-29, the average fixed interest rate on a 10-year refinance loan was 3. , 44%. On a five-year variable rate loan, the rate was 2.60%, according to Credible.com.
Related: Best Student Loan Refinance Lenders
Fixed rate loans
The average fixed rate on 10-year refinance loans last week rose 0.05% to 3.44%. The week before, the average stood at 3.39%.
At the same time last year, the average fixed rate on a 10-year refinance loan was 4.03%, 0.59% higher than the current rate. This means that borrowers who refinance now have the option of locking in a rate that is significantly lower than they would have received at this time last year.
A borrower who refinances $ 20,000 in student loans at the current average fixed rate would pay about $ 197 per month and about $ 3,665 in total interest over 10 years, according to the Forbes Advisor student loan calculator.
Variable rate loans
Average variable rates on five-year refinancing loans increased last week from an average of 2.48% to 2.60%.
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 $ 20,000 loan into a five-year loan at an interest rate of 2.60% would result in a monthly payment of approximately $ 356. A borrower would pay $ 1,350 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?
Compare Student Loan Refinance Rates
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 inferior to 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.
Whether you choose a fixed or variable rate loan, it’s important to compare the rates of multiple lenders to make sure you don’t miss out on any savings. You may be able to benefit from interest rate reductions by opting for automatic payments or having an existing relationship with a lender.
When to refinance student loans
Lenders generally require that you complete your degree before you refinance. While it is possible to find a lender without this requirement, in most cases you will want to wait to refinance until you have graduated.
Keep in mind that you will need a good or a great credit score to get 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 the student loan repayments if you can’t anymore and that the loan will show up on their credit report.
It is important to make sure that you will save enough money when refinancing. While many borrowers with strong credit scores could benefit from refinancing at today’s interest rates, those with poorer credit will not benefit from the lowest rates available.
Do the math to see if refinancing will benefit your situation. Shop around for pricing, then figure out what you could save.
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. For starters, you will lose access to some of the benefits offered by federal student loans. For example, you will no longer have access to income-based repayment plans or 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.