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Homeowners aren’t the only ones who can take advantage of falling interest rates to refinance their debt. After hitting a post-recession peak a year ago, rates for borrowers refinancing student loans have fallen dramatically, according to an analysis of a sample of more than 11,000 refinancings facilitated by the Credible marketplace.
- Rates on 10-year fixed-rate loans averaged 4.70%, down 22% from a July 2018 peak of 6.05%
- Rates on 5-year variable-rate loans averaged 4.03%, down 14% from September
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Savings from refinancing
A borrower repaying the average graduate school debt of $84,300 over 10 years at 6.36% interest — the average rate for grad school loans in recent years — could save:
- $20,927 by refinancing into a 5-year variable rate loan
- $8,327 by refinancing into a 10-year fixed-rate loan
|Monthly payment||Total interest charges||Savings|
|Existing loan (6.36%)||$951||$29,846||N/A|
|5-year variable (4.03%)||$1,554||$8,919||$20,927|
|10-year fixed (4.70%)||$882||$21,519||$8,327|
Homeowners need to keep a close eye on lender fees and other costs when refinancing their mortgage. But fees aren’t typically an issue when refinancing student loans.
Lenders are prohibited by law from charging prepayment penalties on student loans and, among the 10 lenders that compete through the Credible marketplace to refinance student loans, none charge origination fees.
Opportunities for student loan refinancing
Opportunities to refinance student loans arise not only when interest rates fall, but as borrowers boost their credit after leaving school and establishing a history of earnings and credit.
Because rates on new federal student loans are indexed to 10-year Treasury yields, students will have different rates on loans they take out each year they’re in school. In recent years, rates on federal loans to grad students and parents have rarely been below 6%.
Steady growth in federal and private and student loan debt means Americans owe more than $1.6 trillion in education debt. Of that total, about $961.7 billion is in repayment.
Using methodology developed by Goldman Sachs analysts, Credible estimates that today, roughly 8.14 million borrowers could refinance $295.8 billion in student loans at lower rates.
Growth in student loan refinancing
Although there’s been explosive growth in student loan refinancing, only a fraction of borrowers who might benefit have taken the plunge.
According to data compiled by DBRS Inc., last year private lenders packaged $6.3 billion in refinanced student loans into asset-backed securities (ABS), up 22% from $5.2 billion in 2017.
Some borrowers may be reluctant to refinance federal student loans because they would lose benefits like access to income-driven repayment and the potential to qualify for loan forgiveness after making 10, 20, or 25 years of payments.
In addition, political leaders have long advocated for government refinancing or forgiveness programs that may not be available to borrowers who refinance.
Elizabeth Warren introduced a bill in 2014, the Bank on Students Emergency Loan Refinancing Act, that would have created a government program to refinance student loans at lower rates.
But Republicans, many of whom who are in favor of scaling back current loan forgiveness programs, blocked Warren’s plan.
In the meantime, billions of loans have been refinanced by private lenders. DBRS has tracked $18.8 billion in student loan refinancing by private lenders since 2013. That tally does not include refinancings by lenders that hold the loans on their books.
Average refinancing rates by month are based on loans funded by lenders competing to refinance student loans through the Credible marketplace. Variable-rate loans can rise and fall with benchmark interest rates. Savings from refinancing calculation does not attempt to predict how rates on these loans could change over time. The calculations also assume that users will make payments on time, and that there will be no prepayments. Credible’s estimate that 8.14 million borrowers could refinance $295.8 billion in student loans at lower rates assumes that: 25% of the $838.6 billion in federal student loans in repayment as of March 31, 2019 and 70% of private students loans could be refinanced.
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