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When to consider refinancing student loans

Here’s When to Consider Refinancing Your Student Loans

When was the last time you took a close look at your student debt? If you’re like most borrowers, particularly those with six figures of student loan debt from graduate school or MBA programs, you probably shudder at the thought. Chances are, you set up a loan repayment plan after graduation and figured you’d revisit it “later”—say, when you’re making more money, when your career is more secure, when you have more time.

This approach is understandable, since after receiving your undergraduate or graduate degree your focus is on other things (like building a career that will help you pay off your loan balance). But if you let that nebulous “later” date turn into “never,” the repercussions can be costly. At some point, refinancing your student loans could potentially save you a significant amount of money. You just need to figure out if you’ve reached that point.

So how do you know when it’s time for a student loan debt check-in? Here are four factors that should prompt a second look:

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How student loans affect your credit score

How Student Loans Affect Your Credit Score​: 7 Essential FAQs

Got student loans? We’ve got you covered with our Student Loan Smarts blog series. Our expert tips and hacks will help you save money, pay off loans sooner, and stress less about student loan debt. Read the other posts in the series to get all the info you need to make intelligent decisions about your student loans.

Student loans are the ultimate double-edged swords. Invest wisely in your education, and those loans should pay off in the form of higher income over time. But if you mismanage student loan debt, your credit score could suffer—and that could have a big impact on your financial future.

As a student loan lender, we get a lot of great questions about how student loans affect credit score. Here are the top seven.

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3 Factors That Affect Student Loan Interest Rates

Got student loans? We’ve got you covered with our Student Loan Smarts blog series. Our expert tips and hacks will help you save money, pay off loans sooner and stress less about student loan debt. Read the other posts in the series here, and get all the info you need to make intelligent decisions about your student loans.

While you may not have paid much attention to interest rates when you first took out your loans, now’s a good time to take a closer look and consider refinancing. In order to lock in the best rate possible when refinancing, it’s important to know whether student loan interest rates are going up or down.

Interest rates change on a regular basis and depend on certain factors. That’s why you probably graduated with student loans taken out in different years and/or from various lenders—each with a different interest rate. By refinancing, you can consolidate all of those student loans into one loan with a lower interest rate, which will save you money over time.

Top 3 Factors Impacting Your Student Loans Interest Rates

So what are the factors that impact student loan interest rates, and how can they help you decide when to refinance? Here’s what you need to know:

Factor 1: Legislation

Legislation mainly impacts federal student loan interest rates, which are set by Congress.

Before the 2013 passage of the Student Loan Certainty Act, federal student loan interest rates for grad students were flat for a period of seven years, while most other loan interest rates dropped to rock bottom. So, if you took out unsubsidized and/or Grad PLUS loans during that time, you kind of got screwed. That’s why a lot of people with graduate or professional degrees are now refinancing student loans; they’re eager to do what they can to save money on interest.

Recommended: 10 Questions to Ask When Choosing a Student Loan Refinance Lender

Once the act was passed however, all Direct Loan rates became fixed for the life of the loan and tied to financial markets. New rates are set every year on July 1, and are applied to loans disbursed from July 1 through June 30 of the following year. In other words, as prevailing interest rates change from year to year, so too should rates on newly disbursed Direct Loans (more on that in a minute).

How does this impact your rates?

Right now, you can only refi federal loans with a private lender, which can mean losing certain benefits and protections, such as special repayment plans and potential loan forgiveness. Some politicians have called for legislation that would allow borrowers to refinance federal loans with the government, which would ideally let you keep those benefits and lower your rate. However, there’s no telling when or even if federal refinancing legislation will ever pass. Senate Republicans have blocked two refinancing bills put forward in the last couple of years.

If you don’t want to wait around for something that might not happen, take a look at the benefits and protections that may be attached to your federal loans. If they apply to you, you might want to keep waiting; if they don’t, or if saving money is your top priority, you might consider refinancing now.

Factor 2: A Financial Metric

Some student loan interest rates are tied to a financial index or other metric, which means that the rise or fall of the metric number dictates whether a loan’s rate goes up or down. Whether or not fluctuations affect new or previously disbursed loans depends on the type of loan.

For example, as noted above, interest rates for new Direct Loans change annually. Here’s how that works: Each year, fixed interest rates for loans disbursed July 1 through June 30 of the following year are determined based on the May 10-year Treasury note, plus a set margin for each type of loan (e.g., Undergraduate Stafford at +2.05% vs. Graduate PLUS at +4.6%). Previously disbursed Direct Loans are unaffected by these annual changes; the rate applied when you took out the loan is the rate you’ll have until the day you pay it off—unless you refinance.

Related: 5 Tips for Getting the Lowest Rate When Refinancing Student Loans

Variable rate student loans are also impacted by a financial metric, as they are often tied to an index, such as the Prime Rate or the London Interbank Offered Rate (LIBOR). That means that the rate will change periodically as the index changes. Unlike fixed loans, if the rate on your previously disbursed variable loan changes, so will the size of your interest payment.

Federal student loans haven’t offered a variable rate option since 2006, so this mostly affects loans from private lenders.

How does this impact your rates?

Some private lenders will offer the choice of a variable or fixed loan when you’re refinancing, so it’s important to understand the pros and cons of each option. A variable rate loan usually offers a lower initial interest rate than a fixed rate student loan, but because the rate can fluctuate over time, it also presents a greater risk. If interest rates go up, so do your interest payments.

In a nutshell, if you plan to pay off loans relatively quickly, a variable rate loan can be a cost-saving option. But if you’re concerned about interest rates going up, a fixed rate loan might give you more peace of mind.

Factor 3: You

This final factor depends on whether you have a federal or private loan. Believe it or not, the only factor that affects federal student loan interest rates is the type of loan (e.g., a subsidized undergraduate loan vs. Grad PLUS loan). The government doesn’t take your financial data into account when assigning rates—every borrower gets the same rate for the same type of loan.

Private lenders, on the other hand, do care about your ability to repay, so they’ll look at certain financial criteria and your history of managing debt to evaluate how risky it would be to offer you a loan. Generally speaking, the less risk you present as a borrower, the lower your interest rate will be. This rule of thumb applies whether it’s a new loan or a refinanced loan.

How does this impact your rates?

For first-time borrowers, federal loans can be the way to go—after all, most undergrads haven’t had time to build up a history of responsibly (or irresponsibly) using credit. But for graduate and professional school borrowers with clear financial pictures, that one-size-fits-all approach is kind of frustrating. That’s when refinancing comes into play.

So how do you know if you have the financial chops to refinance at a lower rate? In general, a lower debt-to-income ratio and a track record of paying your bills on time should help. Lenders may use different criteria to evaluate your application, so check company websites or call customer service if you’re unsure.

From the micro to macro level, there are several factors that can make student loan interest rates go up and down on a regular basis. If you’re considering refinancing, understanding these factors and keeping tabs on the state of student loan rates are important pieces of the puzzle to help you decide if, and when, the time is right.


refinance student loansrefinance student loans

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How To Prioritize Savings Goals When Paying Down Student Loans

Got student loans? We’ve got you covered with our Student Loan Smarts blog series. Our expert tips and hacks will help you save money, pay off loans sooner, and stress less about student loan debt. Read the other posts in the series to get all the info you need to make intelligent decisions about your student loans.

Student loan debt can cause you to delay important life decisions, such as those around marriage and family, or postpone big savings goals like buying a house. But by refinancing, you won’t have to put your dreams on hold. All you need is a little guidance and a plan.

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How to Choose Between Variable And Fixed Rate Student Loans

Got student loans? We’ve got you covered with our Student Loan Smarts blog series. Our expert tips and hacks may help you save money, pay off loans sooner, and reduce stress over student loan debt. Read the other posts in the series here—and get all the info you need to make intelligent student loan decisions.

So, you’ve settled on student loan refinancing. You’ve filled out the application, have gotten approved (congrats!), and now you’re faced with a couple of loan options—including the choice between a fixed vs. variable rate student loan. Even if you’re already familiar with both, factors like changing interest rates and your own financial situation have bearing on which type of loan is right for you.

What do you need to know before making a decision? Here’s the scoop on how these two options differ.

Fixed-rate student loans:
Generally have a higher interest rate than variable rate student loans
Are not affected by interest rate changes
Charge the same interest rate over the life of the loan

Variable-rate (or floating-rate) student loans:
Generally have a lower initial rate than fixed rate loans
Are affected by interest rate changes, so your loan’s rate can go up or down on a monthly, quarterly, or annual basis

How to Choose
Your final decision depends on your situation.

If you plan to pay off your loan relatively quickly (lucky you), a variable rate student loan may help you save you money. However, be aware that the longer it takes you to pay off the loan, the more opportunity there is for interest rates to rise. You can mitigate your risk by choosing a lender that caps its variable rates.

Related: How To Evaluate a Variable Rate Loan

If you don’t plan to pay off your student loan quickly, if your future income level is uncertain, or if you’re simply uncomfortable taking on extra risk, consider a fixed rate student loan. In today’s low interest rate environment, fixed rates can be competitive. If you have a high interest rate grad school loan, for example, you could get a lower fixed rate by refinancing.

Whether you choose a fixed rate or variable rate student loan, the main thing to remember is that the rate you got when you first took out your loan doesn’t have to be the rate you’re stuck with for life. Knowing your refinancing options can help put your mind at ease—and hopefully save you some money, to boot.

Editor’s Note: This is an updated version of a post we originally published in September 2013. We welcome new comments and questions below.

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