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Last week, the average interest rate on refinanced student loans edged down. For many borrowers, this means that rates remain low enough to make refinancing a winning option for those who can benefit from it.
From September 27 to October 1, the average fixed interest rate on a 10-year refinance loan was 3.36% for borrowers with a credit score of 720 or higher who prequalified in the student loan market. from Credible.com. On a five-year variable rate loan, the average interest rate was 2.65% among the same population, 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 0.05% to 3.36%. The previous week, the average stood at 3.41%.
At the same time last year, the average fixed rate on a 10-year refinance loan was 4.09%, 0.73% higher than the current rate. This means that borrowers who refinance now have the option of locking in a rate 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 would pay about $ 196 per month and about $ 3,576 in total interest over 10 years, according to Forbes Advisor’s student loan calculator.
Variable rate loans
Last week, the average rate on a five-year variable refinancing student loan fell to an average of 2.65% from 2.93%.
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.
Refinancing an existing $ 20,000 loan into a five-year loan at an interest rate of 2.65% would result in a monthly payment of approximately $ 356. A borrower would pay $ 1,376 in total interest over the life of the loan. But the rate in this example is variable, and it may go up or down every month.
Related: Should You Refinance Student Loans?
When to refinance student loans
Lenders generally require that you complete your degree before refinancing. 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 to get the lowest interest rates you will need a good or excellent credit score.
Using a co-signer is an option for those who do not have enough credit or income to qualify for a refinance loan. Alternatively, you can wait until your credit and income are stronger. If you do decide to use a co-signer, make sure they are aware that they will be responsible for the payments if you are unable to do so for some reason. The loan will also appear 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.
Fixed rate loans vs variable rate loans
Refinancing a student loan at the lowest possible interest rate is one of the best ways to reduce the amount of interest you will pay over the life of the loan.
You may find that variable rate loans are initially 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 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 several 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.
Other features of student loan refinancing to consider
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.