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Last week, the average interest rate on refinanced student loans rose. This is good news for borrowers looking to refinance their student loans.
The average fixed interest rate on a 10-year refinance loan was 3.71% from February 7 to February 11. This is for borrowers with a credit score of 720 or higher who have prequalified in Credible.com’s student loan marketplace. The average interest rate on a five-year variable-rate loan was 2.78% 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 rose 0.11% to 3.71%. The previous week, the average was 3.60%.
Fixed interest rates remain the same throughout the term of the borrower’s loan. This allows borrowers refinancing now to lock in a rate much lower than they would have received this time last year. This time last year, the average fixed rate on a 10-year refinance loan was 3.78%, 0.07% higher than the current rate.
A borrower refinancing $20,000 in student loans at the current average fixed rate would pay about $200 per month and about $3,969 in total interest over 10 years, according to Forbes Advisor’s student loan calculator.
Variable rate loans
Last week, the average five-year variable refinance student loan rate fell to an average of 2.78% from 2.96%.
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 rates monthly for borrowers with variable rate loans, but they usually limit the height of the rate, to 18%, for example.
If you were to refinance an existing $20,000 loan into a five-year loan at a variable interest rate of 2.78%, you would pay about $357 on average per month. In total interest over the term of the loan, you would pay approximately $1,445. Of course, since the interest rate is variable, it can fluctuate up or down from month to month.
Related: Should You Refinance Student Loans?
The right time to refinance student loans
Lenders generally require you to graduate before refinancing. While it’s possible to find a lender without this requirement, in most cases you’ll want to wait to refinance after you graduate.
Keep in mind that to get the lowest interest rates, you’ll need good or excellent credit.
If you don’t yet have enough credit or income to qualify, you can either wait and refinance later or use a co-signer. The co-signer you choose should know that they will be responsible for making student loan payments if you can’t and that the loan will show up on their credit report.
Finally, make sure you can save enough money to justify refinancing. At current rates, most borrowers with high credit ratings can benefit from refinancing. But those with less than excellent credit who won’t receive the lowest fixed or variable interest rates may not be able to. Start by exploring the rates you could prequalify for through multiple lenders, then calculate your potential savings.
Other Student Loan Refinance Features to Consider
A big caveat when refinancing federal student loans to private student loans is that you’ll lose many of the benefits of federal loans, 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 plan to refinance 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.
What to Consider When Comparing Student Loan Refinance Rates
Refinancing a student loan at the lowest possible interest rate is one of the best ways to reduce the amount of interest you’ll pay over the life of the loan.
You may find that variable rate loans start 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 term loan but with a manageable payment. Then pay extra whenever you can. This can hedge your risk against possible rate hikes.