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Last week, the average interest rate on refinanced student loans inched down. Overall, rates remain low, making refinancing a student loan a worthwhile option for borrowers.
From January 23 to January 28, the average fixed interest rate on a 10-year refinance loan was 6.44% for borrowers with a credit score of 720 or higher who prequalified on Credible.com’s student loan marketplace. On a five-year variable-rate loan, the average interest rate was 5.72% among the same population, according to Credible.com.
Related: Best Student Loan Refinance Lenders
Fixed-rate Loans
Last week, the average fixed rate on 10-year refinance loans declined by 0.03% to 6.44%. The week prior, the average stood at 6.47%.
At this time last year, the average fixed rate on a 10-year refinance loan was 3.64%, or 2.80% lower than today’s rate. That means that borrowers who refinance now have the chance to lock in a rate that’s significantly lower than they would have received at this time last year.
Let’s say you refinanced $20,000 in student loans at today’s average fixed rate. You’d pay around $226 per month and approximately $7,178 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 moved even lower last week to 5.72% on average from 7.35%.
Variable interest rates fluctuate during a loan term according to the index they’re tied to and market conditions. Many refinance lenders recalculate rates monthly for borrowers with variable-rate loans, but they typically limit how high the rate can go—lenders may set a limit of 18%, for instance.
If you were to refinance an existing $20,000 loan to a five-year loan at a variable interest rate of 5.72%, you’d pay approximately $384 on average per month. In total interest over the life of the loan, you’d pay around $3,043. Of course, since the interest rate is variable, it could fluctuate up or down from month to month.
Related: Should You Refinance Student Loans?
When Should You Refinance Student Loans?
Most lenders require borrowers to complete their degree before refinancing—though not all—so in most cases, wait to refinance until you’ve graduated. You’ll also need a good or excellent credit score and stable income in order to access the lowest interest rates.
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.
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 less-than-great credit who won’t receive the lowest fixed or variable interest rates may not. Start by exploring rates you could prequalify for via multiple lenders, then calculate your potential savings.
Refinancing Federal Loans to Private Loans
A crucial caveat to mention is that refinancing federal student loans to a private loan means you’ll lose many federal loan advantages, like income-driven repayment plans and generous 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 make sure you won’t need these programs if you’re thinking about refinancing federal student loans.
If you do need the benefits of those programs, you could refinance only your private loans or just a portion of your federal loans.
What To Consider When Comparing Student Loan Refinancing 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.
You may find that variable-rate loans start lower than fixed-rate loans. But because they’re variable, they have the potential to rise 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 picking a short loan term but with a manageable payment. Then, pay extra whenever you can. This can hedge your risk against potential rate increases.
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