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Some student loan refinancing interest rates have dropped to the lowest level in more than a year, according to data for the week beginning October 4th from Credible, which looked at borrowers with credit scores of 720 and above in their marketplace. Indeed, average interest rates on 5-year variable loans were at their lowest since Credible began tracking the data last year at 2.57%, while interest rates on 10-year, fixed rate loans ticked up slightly to 3.45%, but were still relatively low. Of course, the rate you’ll actually qualify for depends on a variety of factors, including your credit score, debt levels and income. For some very creditworthy borrowers, some rates start at about 1.8% , but others will pay more than average to refi.
Here are rates from the past five weeks for borrowers with higher credit scores:
|Average student loan refinancing rates for borrowers with credit scores of 720 and above|
|10-year, fixed rate||5-year, variable rate|
Who should, and who should not, refinance their student loans?
The first big question to ask yourself when considering a refi is whether it will save you money — either by reducing your interest rate or shortening the repayment term, or both, says Mark Kantrowitz, student loan expert and author of How to Appeal for More College Financial Aid. Those who have had increases in their income, credit score improvements or who have paid off big debts may be able to snag much better rates than they have now. This calculator can help you figure out how much you’d save by refinancing. Note that while a shorter repayment term may lead to higher monthly payments, it can easily save you thousands in interest. What’s more, “the shorter the repayment term, the lower the interest rate. That’s because lenders factor in the likelihood that interest rates will start rising as time passes,” says Kantrowitz.
The other thing you must consider is what type of loans you have, says Kantrowitz. Those with federal loans should proceed with caution when refinancing into a private student loan. Firstly, you’re likely currently enjoying the student loan interest-free payment moratorium from the federal government right now, which goes through January 2022.
And even after that ends, it still may make sense to skip refinancing as it “would permanently strip federal loans of their potentially useful safeguards, such as access to income-driven repayment plans, deferment and forbearance programs as well as current and potentially future loan forgiveness programs,” says Andrew Pentis, certified student loan counselor and debt expert at StudentLoanHero concurs. Adds Rebecca Safier, certified student loan counselor and debt expert at Student Loan Hero: “Make sure you’ve considered everything you’ll be giving up before finalizing the transaction. The federal government offers you protections that your new private lender will not.”
Should I opt for a fixed-rate or variable rate loan?
Though the lowest rates, to start, are often on variable-rate loans now, fixed-rate loans can be a safer choice in the long run. If you refinance your loan at a variable interest rate, your monthly payment can go up or down — and though it may go down, which would mean a smaller monthly payment, it can also go up and surpass what you’d pay with a fixed-interest rate. Because fixed-rate loans often have very low rates right now, those who expect they’ll hold onto their loan for a bit will likely benefit from opting for a fixed rate loan.
How much can I save by refinancing my student loans?
The amount one can save by refinancing student loans varies, but it’s not uncommon for borrowers to save thousands of dollars over the life of their loan. According to data from New America, the average student loan borrower has about $39,350 in outstanding loans and an average interest of 5.8%. If a borrower in this scenario had a 10-year loan but refinanced to the same term at a 3.8% rate, they’d save about $4,600 over the duration of the loan. If the same person shortened their loan term to 5 years, it would yield about $8,600 in savings. This free calculator can help you determine how much you can save.
One mistake Kantrowitz says people make when trying to assess their savings is that they mistakenly believe that cutting their interest rate in half will cut their monthly payment in half. “It actually cuts the payment by just 10% to 20%, depending on the repayment term since most of the payment goes to principal, not interest,” says Kantrowitz.
Other things to consider if you’re thinking about refinancing your student loans
Though fees for refinancing a mortgage can be steep, refinancing student loans doesn’t typically have a big cost. That said, look out for origination fees, application fees, prepayment penalties, late fees and collections for fees on defaulted loans.
Get your credit score up as much as possible so you can get the best rates. To ensure a higher credit score, make sure you pay bills on time, catching up on past-due accounts, pay down revolving account balances like credit cards and limit how often you apply for new loans.
If you have a weak credit score, some lenders let you apply with a cosigner. “Adding a creditworthy cosigner to your application can help you qualify and get better rates, but your cosigner becomes just as responsible for the loan,” says Safier.