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If you think the interest rate you’re paying on your student loans is too high, there’s a good chance you’re right. Many borrowers have federal student loans issued several years ago when rates were higher, or took out private loans when their credit wasn’t as good. These borrowers — including parents paying back federal PLUS loans — can often qualify to lower the interest rate on their student loans.

In this article, we’ll look at how refinancing student loans can get you a better interest rate. For those who already know the basics, you can use the Credible marketplace to see what rates you prequalify for with multiple, vetted lenders in less than 2 minutes. Checking your rates will not affect your credit score, and your information isn’t shared with lenders unless you see an option you’d like to proceed with.

Key takeaways

  • The relationship between loan repayment terms and interest rates means that those looking for the best rate they can get will choose a loan with the shortest repayment term that they can afford the monthly payment on.
  • You don’t need perfect credit to be approved for refinancing, but even a small improvement in your credit score can help you get better rates.
  • All other things being equal, variable interest rate loans have lower initial rates and monthly payments than fixed-rate loans. But many borrowers prefer the certainty of fixed-rate loans.

What is student loan refinancing?

Student loan refinancing is the process of paying off high-interest loans by taking out a new loan from a private lender, typically at a lower interest rate.

There has been an explosion in the number of lenders offering to refinance both federal and private student loans. Competition between lenders has been good for consumers, because more people are eligible to refinance, and lenders are offering loans with better benefits and rates.

Unlike government student loans, which typically involve no underwriting and take a “one-size-fits-all” approach to interest rates, private student lenders offer lower rates to borrowers with good credit.

With more lenders competing for your business, it’s important to shop around. Unlike rate comparison sites, the Credible marketplace lets you check your options with multiple lenders, without having to apply to each one to see what rates they’d offer you.

The average borrower refinancing saves $18K with Credible. Find out how much you can save in 2 minutes →

How can I get a lower rate?

The rates that you can qualify for when refinancing educational debt will usually depend on three factors: Your credit score, your repayment term, and whether you choose a fixed- or variable-rate loan.

While it might seem obvious that a good credit score will help you get a better interest rate, the amount of time that you’d like to take to pay back your loan also plays a big role. If you qualify to refinance your student loans, you’ll typically have several repayment terms to choose from, ranging from 5 to 20 years, for example. When comparing your options, you’ll typically notice that the shorter the loan term, the lower the interest rate.

Most lenders also offer a choice of fixed or variable interest rate loans. While initial rates on variable-rate loans will be lower than for fixed-rate loans with the same repayment term, some borrowers would rather have the certainty of a rate that’s fixed for the life of the loan — even if it means starting out with a higher interest rate.

Let’s look at the three factors that affect interest rates in a little more detail.

Credit score

Fair Isaac Corp. groups FICO scores in five ranges:

  • 800 and above: “Exceptional” — only 1 percent of borrowers with scores in this range are likely to become delinquent
  • 740-799: “Very good” — about 2 percent of borrowers in this range are likely to become delinquent
  • 670-739: “Good” — about 8 percent of borrowers in this bucket are likely to end up delinquent
  • 580-669: “Fair” — odds are about 28 percent will become delinquent
  • 579 and lower: “Poor” — about 61 percent are likely to become delinquent

Lenders have their own thresholds, but it’s fair to say that the best rates on student loan refinancings are offered to borrowers with very good or exceptional credit scores. If you have a good credit score, you’ll often qualify for refinancing, but you might not be offered the kind of rates you were hoping to see. It’s important to note that even those with fair credit scores may be able to qualify for refinancing by applying with a cosigner, and a cosigner can also help eligible borrowers get better rates.

If you don’t qualify for refinancing, or the rates you qualify for are higher than you’d like, there are some simple steps you can take to improve your credit score. Once you’ve worked on your credit score, you can use Credible to check your rates again.

Borrowers who are on the cusp of a lender’s threshold may be surprised to find that even a small improvement in their credit score can make a significant difference in the kind of offers they get.

Repayment term

All other things being equal, lenders will typically offer the lowest interest rate on loans with shortest repayment terms. The standard repayment term for federal student loans is 10 years. Private lenders offer a choice of repayment terms, such as 5, 7, 10, 12, 15, or 20 years.

The shorter the repayment term, the lower the interest rate you’ll be offered, and the fewer payments you’ll make. So picking the shortest repayment term that fit your budget gets you the best interest rate and the maximizes the savings you can realize by refinancing.

When we analyzed outcomes for borrowers using the Credible marketplace to refinance educational debt, we found that those who moved into a loan with a shorter repayment term lowered their interest rate by 1.71 percentage points on average, and can expect to save $18,668 over the life of their new loan.

Keep in mind that reducing your loan term may increase your monthly payment — it depends on how much of an interest rate reduction you get when you refinance. Credible users who reduced their loan term were willing to pay $151 more a month, on average, in order to maximize their savings.

According to the “2016 Credible Student Loan Refinancing Report,” which looks at the refinancing strategies employed by different types of borrowers, borrowers 50 and older obtained the largest interest rate reductions when refinancing into loans with shorter repayment terms — 2.34 percentage points, on average. That’s in part because they tended to have higher incomes but lower student loan balances than the group as a whole

Many borrowers who are primarily interested in reducing their monthly payment are also able to reduce their interest rate when refinancing into a loan with a longer repayment term. When you use the Credible marketplace to compare your refinancing options, it’s easy to see the relationship between the repayment term and the interest rates you qualify for.

Fixed or variable interest rate?

No matter what kind of loan you’re looking for — a mortgage, a car loan, or a private student loan — you can usually obtain a lower initial rate if you’re offered a variable interest rate loan. But be aware of the risks involved. The reason you are offered a lower initial rate is because you, the borrower, are agreeing to shoulder the risk that interest rates will rise.

The interest rate on variable-rate loans moves up or down in concert with whatever benchmark they are indexed to. Student loans are typically indexed to the prime rate or LIBOR. These benchmarks have been hovering near historic lows since 2008, and borrowers with variable-rate loans have benefited.

But if economic growth picks up, many observers expect central banks to raise rates in the months and years ahead. When interest rate rise, borrowers with variable-rate loans will see their monthly payments increase. But rates typically increase gradually, and borrowers with variable-rate loans can often refinance into a fixed-rate loan if they decide that rates will keep going up. Variable-rate loans often have an upper limit, or ceiling, that caps how high they can go.

Rates on student loans made by the government today are fixed for life, and most private lenders also offer borrowers that option. Nearly six in 10 borrowers who use the Credible marketplace to refinance choose a fixed-rate loan.

If you opt for a fixed-rate student loan, you’ll pass up the chance to start out making lower monthly payments. But if benchmark interest rates like the prime rate and LIBOR go up, your interest rate and your monthly payments will remain unchanged.

Final thoughts

Keep in mind that when you refinance federal student loans with a private lender, you give up benefits that come with federal student loans, such as access to federal income-driven repayment plans and the potential to qualify for loan forgiveness after 10, 20 or 25 years of payments. Those can be valuable benefits of federal student loans for those who are uncertain about their future earnings. But many borrowers decide that the savings they can achieve by refinancing are more important to them.

Federal loan consolidation

Refinancing shouldn’t be confused with federal loan consolidation. A federal direct consolidation loan allows you to combine one or more government student loans into a new loan so that you have one monthly payment. But it doesn’t get you a better interest rate.

With a direct consolidation loan, your rate is a weighted average of the interest rates on all the loans you’re consolidating, rounded up to the nearest one-eighth of 1 percent. If you enroll use a federal direct consolidation loan to stretch out payments over a longer period of time, you may increase your total repayment costs. That can also be the case for borrowers who enroll in income-driven repayment plans like PAYE, REPAYE or IBR.

The Department of Education’s repayment estimator can help you get an idea of what your total repayment costs might be in any government repayment plan, but be aware of its limitations.

Further reading

The following articles can help you understand the ins and outs of student loan refinancing, and how Credible helps you find the best options for your unique situation:

Credible is a multi-lender marketplace that allows borrowers to get personalized rates and compare loans from vetted lenders, without affecting their credit scores.