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Last week, the average interest rate on refinanced student loans rose. Still, 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 in Credible.com’s student loan marketplace from May 9 through 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
Fixed rate loans
Last week, the average fixed rate on 10-year refinance loans rose by 0.28% to 4.91%. The previous week, the average was 4.63%.
Fixed interest rates will not fluctuate over the term of a borrower’s loan. This allows borrowers refinancing now to lock in a rate much lower than they would have received this time last year. This time last year, the average fixed rate on a 10-year refinance loan was 3.59%, 1.32% lower than the current rate.
A borrower refinancing $20,000 in student loans at the current average fixed rate would pay about $211 per month and about $5,350 in total interest over 10 years, according to Forbes Advisor’s student loan calculator.
Variable rate loans
Average variable rates on five-year refinance loans rose last week from an average of 3.04% to 3.94%.
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 rates monthly for borrowers with variable rate loans, but they usually limit the rate height, 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 3.94%, you would pay around $368 on average per month. In total interest over the term of the loan, you would pay approximately $2,067. Of course, since the interest rate is variable, it can fluctuate up or down from month to month.
Related: Should You Refinance Student Loans?
When to Refinance Student Loans
Lenders generally require you to graduate before refinancing. While it’s possible to find a lender without this requirement, in most cases you’ll want to wait to refinance after you graduate.
Keep in mind that to get the lowest interest rates, you’ll need good or excellent credit.
If your credit is low or your income is not high enough to qualify, you have several options. You can wait to refinance until you have accumulated credit or have sufficient income. Or, you can get a co-signer. Just make sure the co-signer knows that if you can’t repay your student loan, they will be responsible. The loan will show up on their credit report.
Finally, make sure you can save enough money to justify refinancing. At current rates, most borrowers with high credit ratings can benefit from refinancing. But those with less than excellent credit who won’t receive the lowest fixed or variable interest rates may not be able to. Start by exploring the rates you could prequalify for through multiple lenders, then calculate your potential savings.
Refinancing of federal loans into 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 certain benefits offered by federal student loans. For example, you will no longer have access to income-tested 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 be sure you won’t need these programs if you plan to refinance 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.
Get the best 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.
Variable rates usually start low, but could go up in the future, making it a gamble. But one way to limit your exposure to risk is to pay off your new refinance loan as quickly as possible. Keep the loan term as short as possible and pay extra when possible so that you are not subject to possible rate increases in the future.
When considering your options, compare rates from multiple student loan refinance lenders to ensure you don’t miss out on possible savings. Determine if you qualify for additional interest rate reductions, possibly by choosing automatic payments or having an existing financial account with a lender.