After several years of interest hikes by the Federal Reserve, student loan refinancing rates aren’t what they used to be. While borrowers could lock in rock-bottom rates around 2.00% a few years ago, today’s rates start closer to 5.00%.
The good news is that rates around 5.00% may be lower than what you currently have, leading to lower monthly payments and long-term savings.
If you’re considering whether to refinance student loans, here’s a closer look at the current student loan refinance landscape so you can make sense of where interest rates stand today.
Key Points
• Student loan interest rates are influenced by the federal funds rate and the borrower’s personal financial factors.
• Refinancing student loans even in a high interest rate environment may save money, adjust repayment terms, and streamline payments.
• Risks of refinancing federal student loans include losing federal protections and becoming ineligible for loan forgiveness.
• Strategies for navigating a high rate environment include waiting for lower rates, locking in fixed rates, and exploring shorter loan terms.
• Building a strong financial profile may improve student loan refinancing opportunities for some borrowers.
Understanding Today’s Student Loan Refinance Market
The interest rates in today’s student loan refinance market are higher than they were a few years ago. Around the start of the pandemic, you could find ultra-low refinancing rates around 2.00%. Now, rates start around 4.50% or 5.00% for well-qualified borrowers.
Although starting rates have more than doubled in the past few years, they could still be lower than your current student loan rates. For example, federal Direct Subsidized and Unsubsidized loans for undergraduates currently carry a fixed rate of 6.53%, while Direct PLUS loans for parents and graduate students are at 9.08%.
If your current rates are high, you may find savings through refinancing student loans even in a high interest environment. Just be aware that refinancing federal loans makes them ineligible for federal benefits such as income-driven repayment plans and federal deferment.
What Drives Student Loan Refinance Rates
Student loan refinancing rates are largely influenced by the federal funds rate, which is set by the Federal Reserve. The Fed hiked this rate multiple times over the past few years in an effort to curb inflation. Lenders adjusted their refinance rates in response, which made it more expensive to borrow money.
The good news is that rates have started to come down. The Federal Reserve dropped the federal funds rate a few times starting in September 2024, resulting in a rate decrease of a full percentage point. Currently, rates seem to be holding steady, though that could change in the coming year.
The interest rate you get when you refinance also depends on your financial profile. Lenders offer the lowest rates to borrowers with the strongest finances, which typically means a high credit score, stable income, and low debt-to-income (DTI) ratio.
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How to Know If Refinancing Still Makes Sense in a High Rate Climate
Refinancing student loans in a high-interest environment could still make sense if it would save you money. Although today’s rates are higher than they used to be, they may still be lower than your current rates. Even a decrease of one percentage point could lead to savings on your student debt.
Many lenders let you check your rates without impacting your credit score through prequalification. If you can find a better rate than you have now, refinancing may be worthwhile. Use a student loan refinancing calculator to crunch the numbers on your potential savings.
You may also refinance student loans to adjust your repayment timeline. You can typically choose terms between five and 15 or 20 years. A longer term could make your monthly payments more manageable — however, you may pay more interest over the life of the loan with an extended term. A shorter term could save you money and get you out of debt faster, though your monthly payments would likely be higher.
If you have federal student loans, you might also consider consolidating them and choosing a new repayment plan. Learn more about student loan consolidation vs. refinancing to decide which option might be the right choice for you.
Strategies to Navigate a High Rate Environment
A high-rate environment isn’t ideal, but there are strategies you can use to minimize interest costs and make informed decisions about your student loan debt.
Consider Waiting for Rates to Drop but With a Plan
If today’s rates are too high, you could wait for them to come down. While you wait, you could use this time to strengthen your financial profile. Take steps to strengthen your credit, pay down your debts, and build a stable income history. That way, you’ll be a stronger candidate for student loan refinancing when rates drop.
You might also start researching lenders and checking your rates through loan prequalification. Preparing now will help you hit the ground running when interest rates start to fall.
Locking in a Fixed Rate Now to Avoid Further Hikes
Interest rates can be unpredictable, and there’s always a chance they could climb again. If you have a variable rate on your student loans, it could go up over time, making your loans more expensive and the monthly payments unpredictable. Locking in a fixed rate now could protect you from this economic uncertainty.
Plus, you could always refinance again if rates drop. Many leading refinancing providers don’t charge fees to refinance student loans, so refinancing multiple times might be a smart move for some borrowers.
Exploring Shorter Loan Terms or Smaller Loan Amounts
Opting for a shorter loan term may also help you save on interest, though your monthly payments will typically be higher. Some lenders offer better student loan refinancing rates on shorter repayment terms.
Plus, a short term will help get you out of debt faster, limiting your overall interest charges. If you owe multiple student loans, you could consider refinancing only the high-rate loans that would benefit from refinancing now.
Benefits of Refinancing Despite Higher Rates
Refinancing student loans even when interest rates are high can have several potential benefits:
• Save money: Refinancing student loans can save you money if you can get a better rate than you have now or pay off your debt faster.
• Adjust repayment terms: A new repayment schedule could help you accelerate student loan repayment or cut your monthly payments if they’ve become unaffordable.
• Combine multiple loans into one: If you have several student loans, you can combine them into one new loan, thereby simplifying repayment.
• Transfer a parent loan to the student: Parent borrowers may want their child to refinance a student loan the parent took out in their own name to assume responsibility for the debt.
Risks of Refinancing During a Period of High Interest Rates
At the same time, refinancing student loans when interest is high has risks:
• Lose federal protections: If you refinance federal loans, you’ll lose access to federal benefits, such as income-driven repayment plans, forbearance, and deferment.
• Become ineligible for loan forgiveness: Refinancing federal loans means you’ll forfeit eligibility for federal forgiveness programs like Public Service Loan Forgiveness and Teacher Loan Forgiveness.
• Have trouble getting approved: Lenders typically look for a strong credit score, stable income, and low DTI ratio. If your financial situation is shaky, you could end up with a high interest rate or have your refinancing application denied.
The Takeaway
A high-interest environment isn’t ideal, but it is still possible to reduce your current student loan rates through refinancing. If you’re considering whether now is a good time to refinance student loans, start by checking your rates through prequalification. Lenders like SoFi let you review offers with no commitment or impact on your credit score.
If you can get a good rate, you may want to consider refinancing. If not, focus on building your credit and financial profile so you’ll be a stronger candidate if rates drop in the future.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
FAQ
What is considered a high interest rate for student loan refinancing?
A high interest rate for student loan refinancing is one that’s higher than your current rates, as it could increase your costs of borrowing. Federal student loans currently carry rates between 6.53% and 9.08%, and private student loans start at about 5.00%, so a high refinancing rate would be one that’s even higher.
Should I refinance my student loans now or wait?
Whether to refinance student loans now depends on your situation. Refinancing now could make sense if you can qualify for a lower interest rate. You might also benefit from switching from a variable rate to a fixed rate through refinancing so your monthly payments and long-term loan costs are predictable. However, you might be better off waiting if you can’t qualify for a lower interest rate.
Can I refinance again if interest rates drop later?
Yes, you can refinance student loans again if interest rates drop in the future, as long as you meet a lender’s refinance loan approval requirements. Lenders look at your credit, income, debt-to-income ratio, and other factors when considering your application for student loan refinancing.
How do I know if I’m getting a good refinance rate right now?
You’re getting a good refinance rate if the rate is lower than your current rate and would save you money on your student loans. You can also check your rate against the lender’s current rate offerings to see if it falls on the low end of the range. Finally, you can shop around with different lenders to see if you might get a better rate with a new refinance loan from a new lender.
photo credit: iStock/gorodenkoff
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