Here's why variable-rate student loan refinancing may be a smart move

Fixed-rate student loan refinancing has the benefit of predictability, but variable-rate student loans may be a good option depending on the term of the loan. Learn more about your student loan options so you can pay less interest over time. (iStock)

When refinancing your private student loans, getting the lowest possible interest rate should be a top priority. A lower student loan rate means you'll pay less in financing charges over time, making it the cheaper option for repaying your college debt.

Variable-rate student loans typically come with lower rates than fixed-rate student loans, but they can be unpredictable. Your interest rate may change over time due to  several economic factors that are hard to predict. If your variable rate does increase over time, though, it's possible to refinance again since student loan lenders are prohibited from charging prepayment fees.

Still, it's essential to weigh the benefits and drawbacks of fixed or variable-rate student loans. Keep reading to learn more about the difference between these repayment options, and visit Credible to shop around for student loan refinancing offers without impacting your credit score. 


Comparing interest rates on variable vs. fixed-rate student loan refinancing

Student loan interest rates are hovering near record lows, according to data from Credible, but variable-rate loans are still the cheaper option. Rates on 5-year variable-rate student loans fell to 2.59% for well-qualified borrowers who took out loans on Credible's marketplace during the week of August 9. In contrast, the rates on 10-year fixed-rate loans averaged 3.46% for the same time period. 

A borrower who refinances $40,000 worth of student loans could save more than $4,600 in total interest charges by refinancing to a 5-year variable-rate loan with that interest rate compared to a 10-year fixed-rate loan thanks to the lower rate and shorter repayment term. That is — if the variable interest rate doesn't increase over the life of the loan.

But if the variable rate does increase over the loan duration, it may still be lower than what's offered by a fixed-rate loan. Plus, it's possible to refinance your student loans without paying any fees at all. If you're unhappy with how your variable interest rate changes over time, you can refinance again without having to worry about refinancing fees.

The table below shows current fixed and variable student loan rates from real lenders. You can also see your estimated student loan refinance rate in just minutes on Credible.


When is variable-rate student loan refinancing a smart move?

The decision to choose a variable or fixed interest rate when refinancing your private loans will depend on a number of factors, including:

  • The length of the repayment term
  • The monthly payments you can afford
  • How interest rates are expected to change over time

About a fifth of borrowers who refinance their student loans on Credible choose a variable rate, according to a recent Credible analysis. Most borrowers who choose a variable-rate loan plan on repaying their loans quickly with a term of 12 years or less. Variable-rate student loan interest rates are lowest when borrowers choose the shortest loan term available, which is 5 years.

Keep in mind that a short-term loan will have a larger monthly loan payment, but repaying your loans faster means you'll pay less in interest over time. If you can afford larger monthly payments, you can get out of debt faster and save money while doing it. Estimate your monthly student loan payments using Credible's student loan calculator


Will student loan interest rates increase anytime soon?

The final factor in deciding whether to refinance to a variable interest rate loan is a little less simple to predict. Because interest rates can rise or fall due to several economic factors, you should consider interest rate trends to estimate if your rate will rise or fall over the life of your loan.

Interest rates tend to stay low when economic conditions are weak or uncertain, which is why rates fell to all-time lows during the coronavirus pandemic. But when the economy is strong, interest rates typically rise. The Federal Reserve expects interest rates to increase over the next few years, with two rate hikes predicted by 2023

There is a chance that if you take out a variable-rate student loan now, the interest rate will increase or decrease over time. But there's also no way to know for certain what the interest rate environment will look like in the future, which is why refinancing to a variable rate can be unpredictable.

However, the economy isn't the only factor driving interest rates. Student loan refinancing companies also consider a borrower's credit score and debt-to-income ratio (DTI), as well as the loan amount and repayment term. The lowest rates are reserved for borrowers with an excellent credit score and low DTI ratio. It may also be worthwhile to look into taking out a student loan with a cosigner to improve your creditworthiness.

Since student loan interest rates can differ between lenders, it's important to compare rates across multiple lenders to get the best possible rate for your situation. You can compare student loan refinance rates and loan repayment options on Credible without impacting your credit score, so you have nothing to lose while shopping around for the best offer. 


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