The average interest rate on refinanced student loans fell last week. For many borrowers, rates remain low enough to make refinancing a good option.
The average fixed interest rate on a 10-year refinance loan was 5.56% from September 26 to October 1. That’s for borrowers with a credit score of 720 or higher who prequalified on Credible.com’s student loan marketplace. The average interest rate on a five-year variable-rate loan was 3.38% among the same population, according to Credible.com.
Last week, the average fixed rate on 10-year refinance loans decreased by 0.15% to 5.56%. The week prior, the average stood at 5.71%.
At this time last year, the average fixed rate on a 10-year refinance loan was 3.36%, or 2.20% lower than today’s rate. That means that borrowers who refinance now have the chance to lock in a rate that’s substantially lower than they would have received at this time last year.
A borrower who refinances $20,000 in student loans to today’s average fixed rate would pay around $218 per month and approximately $6,118 in total interest over 10 years, according to Forbes Advisor’s student loan calculator.
Last week, the average rate on a variable five-year refinance student loan fell to 3.38% on average from 4.61%.
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.
Let’s say you refinanced an existing $20,000 loan to a five-year loan with a variable interest rate of 3.38%. You’d pay about $363 on average per month. You’d pay approximately $1,766 in total interest over the life of the loan. Keep in mind that since the interest 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 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.
Getting The Best 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.
Rates on variable loans may start out lower than rates on fixed-rate loans. Of course, because they’re variable, they’re subject to interest rate increases. You can limit the risk of interest rate increases with variable-rate loans by paying off your loan as quickly as possible. Still, if you like the reliability of a fixed payment, fixed-rate loans could be a better choice.
Regardless of whether you decide on a fixed- or variable-rate loan, it’s important to compare rates across multiple lenders to make sure you’re not missing out on possible savings. There’s a chance you could qualify for interest rate discounts by opting for automatic payments or by having an existing relationship with a lender.
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.
If you’re thinking about refinancing federal student loans, first make sure you likely won’t need to use any of these programs. This may be the case if your income is stable and you plan to pay off a refinance loan quickly. You always have the option to refinance only your private loans, or only a portion of your federal loans. Since federal loans’ fixed interest rates are typically quite low, you may also decide refinancing wouldn’t lead to substantial savings.