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Last week, the average interest rate on refinanced student loans fell. Rates remain low enough that many borrowers justify refinancing their student loans.
For borrowers with a credit score of 720 or higher who prequalified on Credible.com’s student loan market from September 20-24, the average fixed interest rate on a 10-year refinance loan was 3. , 41%. On a five-year variable rate loan, the rate was 2.93%, according to Credible.com.
Related: Best Student Loan Refinance Lenders
Fixed rate loans
The average fixed rate on 10-year refinance loans last week fell 0.08% to 3.41%. The previous week, the average stood at 3.49%.
Fixed interest rates do not change during the life of a borrower’s loan. This allows borrowers who are refinancing now to lock in a rate that is significantly lower 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 4.12%, 0.71% higher than the current rate.
A borrower who refinances $ 20,000 in student loans at the current average fixed rate would pay about $ 197 per month and about $ 3,632 in total interest over 10 years, according to the Forbes Advisor student loan calculator.
Variable rate loans
Last week, the average rate for a five-year variable refinancing student loan fell to 2.93% on average from 2.95%.
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 monthly for borrowers with variable rate loans, but they usually limit the rate up to 18%, for example.
If you were to refinance an existing $ 20,000 loan into a five-year loan at a variable interest rate of 2.93%, you would pay around $ 359 on average per month. In total interest over the life of the loan, you would pay approximately $ 1,525. Of course, since the interest rate is variable, it can go up or down from month to month.
Related: Should You Refinance Student Loans?
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 the student loan repayments if you can’t anymore and that the loan will show up on their credit report.
Before choosing to refinance, calculate your potential savings. It is important to make sure that you are saving enough to justify refinancing. Shop with several lenders for rates and take your credit score into account when shopping. Keep in mind that those with the highest credit scores receive the lowest rates.
Refinancing Federal Loans to Private Loans
When you refinance federal student loans to a private loan, you will lose access to some of the benefits of federal loans. You will no longer have access to features such as:
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.
Fixed rate loans vs variable rate loans
One of the big goals of refinancing student loans, for many borrowers, is to reduce the amount of interest paid. And that means getting the lowest possible interest rate.
You may find that variable rate loans start off 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-term loan 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.