Borrowers seeking to refinance student loans this summer had an opportunity to lock in the lowest fixed rates ever offered by lenders competing through the Credible marketplace, as interest rates continued to fall during the coronavirus pandemic.
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According to an analysis of a representative sample of 60,000 rate requests submitted to the Credible marketplace, during August:
- Rates on 10-year fixed-rate loans averaged a record low of 4.31%, down 29% from a May 2018 peak of 6.09%
- Rates on 5-year variable-rate loans averaged 3.17%, up from a previous record low of 2.82% seen in June, but down 37% from a 2018 high of 5.05%.
Student loan refinance rates by credit score
While federal student loan rates are “one-size-fits-all,” rates offered by private lenders depend on a borrower’s credit score, as well as the loan term and type. So after they graduate, borrowers with good credit are often able to refinance loans they took out during college at lower rates.
The chart below shows average prequalified rates for borrowers using the Credible marketplace to select a lender in August, by credit score.
Opportunity to refinance private student loans
To provide relief from the economic impacts of the coronavirus pandemic, interest and payments on federal student loans has been suspended through Dec. 31, 2020. With rates on federal loans at 0% through the end of the year, there’s little incentive to refinance federal student loan.
But many borrowers with private student loans are taking advantage of low rates environment to refinance their education debt.
Not only can student loan borrowers often qualify for a lower interest rate, but some choose to extend their repayment term when refinancing, which can dramatically reduce monthly payments. Lowering the monthly payment on your student loans can improve your monthly debt-to-income ratio, increasing the odds of qualifying for a mortgage.
Refinancing federal student loans
If the interest waiver on federal student loans is allowed to expire at the end of 2020, it will again make sense to look into refinancing federal loans if they have high interest rates, such as PLUS loans.
But refinancing federal loans with a private lender means giving up access to federal borrower benefits, such as access to income-driven repayment plans with potential loan forgiveness after 10, 20, or 25 years of payments. Although private student lenders may provide deferment or forbearance to borrowers experiencing economic hardship, private student loan forgiveness is typically offered only when borrowers become disabled or die.
It’s also important to keep in mind that Congress may approve additional relief for federal loan borrowers, including loan forgiveness. If you refinance federal student loans with a private student lender, those loans will not qualify for relief targeted to federal student loans.
Federal student loan borrowers who want to lower their monthly payments can often qualify for federal student loan consolidation, regardless of their credit score. Federal loan consolidation can lower your monthly payment by extending your repayment term. But because you don’t get a lower interest rate, your overall repayment costs may increase.
Why rates are low
To encourage borrowing and stimulate the economy, the Federal Reserve has slashed short-term interest rates to close to zero. The Fed is also buying up trillions of dollars in Treasury notes and mortgage bonds, which has helped push Treasury yields and mortgage rates to record lows this summer.
Falling yields on Treasury notes have reduced the government’s cost of borrowing, so rates on federal loans taken out during the 2020-21 academic year will be the lowest in history.
Like mortgages, many private student loans are securitized and sold into asset-backed securities. Although asset-backed securities backed by private student loans are not guaranteed by the government, they continue to attract investors who view refinanced student loans as less risky than other types of loans. Borrowers who qualify to refinance student loans typically have good credit and hold degrees in fields that are in demand, reducing the chance that they’ll be laid off during economic downturns.
Methodology: Average refinancing rates by month are based on prequalified rates selected by borrowers using the Credible marketplace to request rates from multiple lenders. Variable-rate loans can rise and fall with benchmark interest rates.
Credible is a multi-lender marketplace that empowers consumers to discover financial products that are the best fit for their unique circumstances. Credible’s integrations with leading lenders and credit bureaus allow consumers to quickly compare accurate, personalized loan options ― without putting their personal information at risk or affecting their credit score. The Credible marketplace provides an unrivaled customer experience, as reflected by over 3,700 positive Trustpilot reviews and a TrustScore of 4.7/5.