As of December 18, 2023, borrowers seeking to refinance student loans are facing a significant uptick in interest rates, according to data from Credible.com’s student loan marketplace.
The average fixed interest rate on a 10-year refinance loan for those with a credit score of 720 or higher stands at 7.68%, while the rate for a five-year variable-rate loan is 6.12%.
Fixed-Rate Loans on the Rise
The average fixed rate on 10-year refinance loans saw a weekly increase of 0.07 percentage points, reaching 7.68%. A year ago, borrowers could secure a 10-year fixed refinance loan at an average rate of 6.22%, highlighting a substantial 1.46 percentage point surge.
Fixed interest rates provide borrowers with stability as they remain constant throughout the loan term. However, the current rates reflect an increase compared to last year, potentially impacting the financial burden on those looking to refinance. For instance, a borrower refinancing $20,000 at the current average fixed rate would face monthly payments of around $239 and pay approximately $8,714 in total interest over a 10-year period.
Variable-Rate Loans and Fluctuations
In contrast, the average variable rates on five-year refinance loans decreased by 0.16% to 6.12%. Variable interest rates, tied to market conditions, can fluctuate over the loan term. While the current rate offers a lower monthly payment—approximately $388 on average for a $20,000 loan—the fluctuating nature introduces uncertainty into the total interest paid over the life of the loan.
Timing and Strategies for Refinancing
Choosing the right time to refinance is crucial, and lenders generally require completion of one’s degree before initiating the process. A higher credit score, typically in the good or excellent range, is essential for securing the lowest interest rates. Borrowers with less favorable credit may consider using a co-signer or waiting until their credit and income improve.
For those seeking the best rates, strategic steps include improving credit scores by paying down debts and addressing credit report errors. Additionally, exploring co-signer options or comparing offers from multiple lenders can help secure a favorable refinance rate.
Federal Loans to Private Loans: A Cautionary Note
While seeking lower interest rates is a common motivation for refinancing, borrowers considering moving from federal to private loans must weigh the potential loss of federal loan advantages. Income-driven repayment plans, deferment options, and forbearance benefits are some of the advantages that federal loans offer but are forfeited when switching to private loans. Careful consideration is advised to ensure that the savings from refinancing outweigh the benefits of federal loan programs.
As interest rates continue to evolve, borrowers are encouraged to stay informed about market trends and carefully assess their financial situation before committing to student loan refinancing.
