Refinancing a Student Loan? What You Should Know about Fixed Rates and Variable RatesMay 14, 2021
Climbing into bed with freshly washed sheets. Stepping on a crunchy leaf. That first, marvelous sip of coffee in the morning. We often overlook these simple pleasures that make life a little bit better every day. What about finding a forgotten $20 bill in your pocket? Refinancing your student loan can be just like that, only you get to find that extra money every month.
When you consider the benefits of student loan refinancing, the decision is often a simple one. When you refinance your student loans, you transfer your debt to a new lender in exchange for new loan terms. Often, this means a lower interest rate and the ability to choose a new loan term that better fits your financial goals. What complicates the process is exactly how to refinance and with who?
Let’s start with the who. There are hundreds of financial institutions that can help you consolidate or refinance your student loan. One thing borrowers should keep an eye out for, however, is an organization that offers no application fees, no loan origination fees, and no penalty for paying off your loan early.
When it comes to the how, the first step is getting prequalified for a better look at your potential savings. Prequalifying with a student lender means undergoing a soft credit check to learn the interest rates you may qualify for if you decided to refinance.
Once you’ve prequalified and weighed your options, then you can choose the plan that works best for you and apply. Be sure to carefully consider the interest rates available to you when you’re considering student loan refinancing. Here’s why it matters:
If you have a $30,000 student loan balance with a 5% interest rate and 15-year term, you’ll make a monthly payment of $158 – that also accounts for $8,469 in interest costs over the life of the loan. If you refinance to a 2.5% interest rate, your monthly payment will drop to $133, and you’ll only pay $4,004 in interest over the 15-year term. That’s more than $4,000 in savings on interest alone, not to mention the $25 decrease in your monthly payment!
But it’s important to point out that the type of rate is also important. Fixed-rate loans and variable rate loans are very different, and it’s important to choose the type of rate that’s right for you.
Fixed Rate Student Loans vs Variable Rate Student Loans
Here are a few of the primary differences between fixed and variable rate student loans. You can compare the two to determine which may be the better fit for your needs:
|Fixed Rate||Variable Rate|
|Same interest rate throughout the life of the loan||Changing interest rate, up or down, over the life of the loan|
|Monthly payments don’t change based on market fluctuations||Monthly payments change frequently based on market fluctuations|
|Tend to have higher initial interest rates||Tend to have lower initial interest rates|
|More consistency, but generally lower savings potential over the life of the loan||Generally higher (but riskier) savings potential over the life of the loan|
|Fixed rate protects borrowers from changing rates||Interest rate caps protect borrowers from rates going too high|
|Dependent on credit score||Dependent on credit score|
|May be better for students with little or poor credit history||May reward students with fair and good credit|
|Available with private or federal student loans||Only available for private or refinanced student loans|
What’s the Best Choice for My Student Loan?
Ultimately, choosing the right lender and type of student loan is up to you. Be sure to consider your credit history, how much money you make, how many other loans you have, and your risk tolerance.
Also, don’t forget to check out ELFI’s Student Loan Refinance Calculator* to see how student loan refinancing may affect your loans.