Student loan refinancing can help you to save money on your educational debt. But before you consider refinancing, it's important to know how the process works and how student loan refinancing rates affect what you'd pay.
Credible can help you explore your options for refinancing student loans so you can determine if doing so is right for you.
What is student loan refinancing?
Student loan refinancing involves paying off existing student debt using a new refinance loan made by a bank, credit union, or online lender.
Both federal and private student loans can be refinanced, but many people opt to refinance private loans only rather than giving up borrower benefits of federal loans such as flexibility in payment options and loan forgiveness opportunities.
After refinancing, you'll have a new loan, usually with a new loan servicer, that replaced your existing loans.
How do I get the best student loan refinancing rate?
Even a small difference in APR can have a big impact on cost when you're repaying student loans over several years. To make sure you get the best rate, aim to shore up your finances before applying. That means making sure you have a good credit score and proof of stable, reliable income. If you don't have those two things, consider applying with a cosigner who does so you can qualify for a loan at a competitive rate.
Student loan refinancing rates have fallen to new lows, too. During August, rates on 10-year fixed-rate loans averaged 4.31%, down 29% from a May 2018 peak of 6.09%, according to an analysis of a sample of more than 60,000 student loan refinancings facilitated by the Credible marketplace. Rates on 5-year variable-rate loans averaged 3.17%, down 37% from a 2018 high of 5.05%.
Comparison shopping to get quotes from several lenders can also help ensure you're getting the most affordable loan possible as rates do vary. You can use Credible to compare student loan refinancing rates from multiple lenders at once without affecting your credit score.
How much does refinancing student loans cost?
Refinancing may change your monthly payment and total payment cost, but your new loan should be cheaper. You can use an online student loan repayment calculator to see how your new loan would affect the costs of your educational debt.
However, while your payment will change, getting your new refinance loan shouldn't cost you anything. Credible's partner lenders do not charge loan application fees, prepayment penalties, or origination fees so visit Credible today to compare rates from multiple lenders at once so you can find an affordable option.
What are student loan refinancing rates?
For most people, the goal of refinancing student loans is to lower the cost of repaying educational debt. But that happens only if you qualify for a refinance loan at a lower APR than you're currently paying on your existing debt. Student loan refinancing rates determine if that can happen.
Your refinance rate determines the interest you'll pay to borrow on your new loan. If your current interest rate is 10% and you can refinance at 5%, refinancing should save you money. But if the loans you're paying now have a 6% interest rate and you can only qualify for a refinance loan at 9 percent, you likely wouldn't want to refinance as doing so would mean you'd owe your lender more interest for the privilege of borrowing.
What are student loan refinancing rates right now?
If you're considering refinancing your loans, now is likely a good time to do it as well-qualified borrowers should be able to qualify for interest rates near record lows. In fact, some lenders are offering variable rate loans as low as 1.95% and fixed-rate loans as low as 2.79% as of September, according to a Credible rates table. These rates are considerably lower than they were a year ago, as offers available on Credible in May 2019 started at 2.80% for variable-rate loans and 3.39% for fixed-rate loans.
Rates are near record lows because the Federal Reserve is expecting to keep is benchmark interest rates near zero through 2022. Since it is very affordable for banks to borrow money from each other, the savings are largely passed on to the consumer.
What's the difference between fixed and variable rates?
When comparing loan offers, you'll notice you have a choice of a fixed- or variable-rate loan.
While loans with variable rates generally have a lower interest rate than fixed-rate loans, this rate can change. Variable-rate loans are tied to a financial index, so could rise and make loan payments and total repayment costs higher. With fixed-rate loans, your rate and payment are guaranteed to stay the same for the life of the loan so you're taking on less risk.
The right time to refinance your loans depends on your situation. If you can qualify for a new loan at a lower rate, there's no wrong time to refinance. But if you're not able to get approved right now because of your credit, income, or other factors -- or if you could get only a loan at a high rate -- you may want to wait until your financial situation improves.
Pros and cons of refinancing my student loans
If you can qualify to refinance private student loans at a lower rate than you're currently paying, there are often no downsides to refinancing. You'll have to spend a little time researching your options, but the Internet has made applying for a refinance loan easy.
The only possible risk is that, if you make your repayment timeline longer, you could end up paying more total interest over time than with your current loan -- even if your new loan has a lower rate. But this is easy to avoid by choosing a loan with the same repayment timeline or a shorter one, or by making extra payments if you opt for a longer term loan.
If you're considering refinancing federal student loans, though, there are considerable downsides. You will have to give up the option to change your repayment plan as needed; won't have any options for deferment where the government subsidizes interest; will have less flexibility in forbearance; won't have access to any income-driven payment plans; and will forgo any chance at loan forgiveness. You need to think very carefully before refinancing federal loans because of all that you're giving up.