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Last week, the average interest rate on refinanced student loans remained the same. Rates remain low enough for many borrowers to justify refinancing their student loans.
The average fixed interest rate on a 10-year refinance loan was 3.65% from July 5 to July 9. That’s for borrowers with a credit score of 720 or higher who prequalified on Credible.com’s student loan marketplace. The average interest rate on a five-year variable-rate loan was 3.05% among the same population, according to Credible.com.
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The average fixed rate on 10-year refinance loans last week stood at 3.65%, same as the week prior.
Fixed interest rates remain the same throughout a borrower’s loan term. That allows borrowers refinancing now to lock in a rate much lower than they would have received this time last year. At this time last year, the average fixed rate on a 10-year refinance loan was 4.32%, 0.67% higher than today’s rate.
A borrower who refinances $20,000 in student loans to today’s average fixed rate would pay around $199 per month and approximately $3,902 in total over 10 years, according to Forbes Advisor’s student loan calculator.
The average variable rate on a five-year refinance loan jumped up last week. It fell to 3.05% from 3.04% the previous week.
In contrast to fixed rates, variable interest rates fluctuate over the course of a loan term according to market conditions and the index they’re tied to. Many refinance lenders recalculate rates monthly for borrowers with variable-rate loans, but they typically limit how high the rate can go—to 18%, for instance.
Refinancing an existing $20,000 loan to a five-year loan at 3.05% interest would yield a monthly payment of approximately $360. A borrower would pay $1,589 in total interest over the life of the loan. But since the rate in this example is variable, it could go up or down from month to month within that time frame.
RELATED: Should You Refinance Student Loans?
Fixed-rate Loans vs. Variable-rate Loans
For most borrowers, the biggest motivation to refinance student loans is to reduce the amount of interest they’ll pay. That means choosing the lowest possible interest rate is a top priority.
You may find that variable-rate loans start out 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 loan term that’s short but with a payment that’s manageable. Then, pay extra whenever you can. This can hedge your risk against potential rate increases.
When considering your options, compare rates across multiple student loan refinancing lenders to ensure you’re not missing out on possible savings. Explore whether you qualify for additional interest rate discounts, potentially by choosing automatic payments or by having an existing financial account with a lender.
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. First explore rates you could prequalify for via multiple lenders, then calculate your potential savings.
Other Student Loan Refinancing Features to Consider
One big catch when refinancing federal student loans to private student loans is that you’ll lose many federal loan benefits, like income-driven repayment plans and generous deferment and forbearance options.
You may not need these programs if you have stable income and you plan to quickly pay off your loan. 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.