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The average interest rate on refinanced student loans rose last week. For many borrowers, rates remain low enough to make refinancing a good option.
From June 28, 2021, to July 2, 2021, the average fixed interest rate on a 10-year refinance loan was 3.65% 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 3.04% among the same population, according to Credible.com.
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Last week, from June 28 to July 2, The average fixed rate on 10-year refinance loans last week moved up 0.06% to 3.65%. The week prior, the average stood at 3.59%.
Fixed interest rates don’t change throughout a borrower’s loan term. That allows borrowers refinancing now to lock in a rate substantially 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 4.37%, 0.72% 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.
Average variable rates on five-year refinance loans moved higher last week, to 3.04% on average from 2.94%.
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 3.04% interest would yield a monthly payment of approximately $360. A borrower would pay $1,584 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.
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Comparing Student Loan Refinancing Rates
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.
While variable rates may start out low, they could rise in the future, making them a gamble. But one way to limit your risk exposure is to pay off your new refinance loan as fast as possible. Choose as short a loan term as you can manage, and pay extra when possible so that you’re not subject to potential rate increases in the future.
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 to 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
A crucial caveat to remember is that refinancing federal student loans to a private loan means you’ll lose many federal loan benefits, like income-driven repayment plans and generous deferment and forbearance options.
If you’re thinking about refinancing federal student loans, first make sure you likely won’t need to use any of these programs. This may be the case if your income is stable and you plan to pay off a refinance loan quickly. You always have the option to refinance only your private loans, or only a portion of your federal loans. Since federal loans’ fixed interest rates are typically quite low, you may also decide refinancing wouldn’t lead to substantial savings.