Refinancing could also eliminate protections and benefits from your original student loan, particularly if you convert a federal student loan into a private one. Plus, current interest rates are significantly higher going into 2024 than they were a few years ago, minimizing the potential for big savings.
Before you refinance, make sure you understand your options. Learn more about the student loan refinance environment so you can make the best decision for your education debt.
Student Loan Refinancing Interest Rates in 2024
Since March of 2022, the Federal Reserve has hiked the federal funds rate 11 times in an attempt to fight 40-year-high inflation rates. That rate influences short-term interest rates on consumer loans and, as a result, student loan refinance rates have nearly doubled since their record lows in 2021.
“Borrowers should not refinance … if this will cause their interest rates to increase,” says financial aid expert Mark Kantrowitz. “If a borrower has a much higher interest rate from several years ago on their federal loans, refinancing to obtain a lower interest rate may save some money.”
Kantrowitz suggests that the Federal Reserve Board may be nearing the end of interest rate hikes, but rates will likely remain high for at least the near future.
However, it may still be possible to qualify for a lower rate than you currently have. According to analysis from U.S. News, the current average student loan refinancing rates for a fixed-rate loan range from 4.87% to 10.04% and from 5.15% to 10.57% for a variable-rate loan.
When It Makes Sense to Refinance Student Loans
Is refinancing your student loans the right choice for you now? You should consider it seriously if:
Your Credit Score Is Strong Enough
You may qualify for student loan refinancing with a FICO score of about 650, but a higher score can get you a better rate and possibly more cash flow.
“If refinancing an existing loan allows the borrower to have more access to money for their current lifestyle, future retirement or pay down more expensive debt, it’s worth considering,” says Jamie Hopkins, senior vice president of Private Wealth Management at Bryn Mawr Trust.
Your Private Student Loan Has a Variable Interest Rate
With a variable-rate loan, at some point you could see your interest rate go up as market rates change. If that happens, a new fixed-rate loan might be cheaper. The same goes if you have a private loan with a high interest rate.
“Borrowers who have older private student loans with high balances and higher interest rates may find an opportunity for savings with a drop in the rate,” says Bruce McClary, senior vice president of communications for the National Foundation for Credit Counseling and former U.S. News contributor.
You Want to Reduce Your Number of Monthly Payments
If you have multiple private student loans, you might want to refinance them into a single loan so you can make one monthly payment. If you want to reduce your number of federal loan payments but not change to private, you would have to go through a loan consolidation, not a refinance.
Your new federal direct consolidation loan would have an interest rate that is the weighted average of your current loans, rounded up to the nearest one-eighth of 1%. Make sure you understand the difference between federal student loan consolidation and private student loan refinancing before making a decision.
You Want to Release a Co-Signer
If you can refinance a private student loan in your name alone, you could free a co-signer from responsibility for your debt. To use this option, you’ll need to meet a lender’s requirements for credit and income on your own.
Note that refinancing isn’t the only way to remove your co-signer from a loan, as some lenders offer co-signer release after a certain number of consecutive on-time payments.
Types of Student Loans You Can Refinance
Both private and federal student loans are eligible for refinancing through a private lender, but there are different considerations for each type of loan.
Federal Student Loans
The federal student loan emergency forbearance recently came to an end, and borrowers are once again on the hook for repayment. Interest began accruing again in September 2023 and payments restarted in October.
If you’re dealing with high interest rates on your federal student loans, refinancing is one strategy that could help. Borrowers with strong credit scores may be able to snag a better rate through refinancing.
However, federal borrowers should proceed with caution, as refinancing federal student loans with a private lender means forfeiting access to federal repayment plans, forgiveness programs and other protections.
“Borrowers who refinance federal loans into private loans will lose the superior benefits of federal loans,” says Kantrowitz.
If your financial situation is in good shape and the benefits of refinancing outweigh the costs of ditching your federal loans, it might be the best path forward for you. However, if you’re relying on any federal protections, using an income-driven repayment plan or working toward a program like Public Service Loan Forgiveness (PSLF), refinancing your federal student loans with a private lender would probably be a bad idea.
This includes income-driven repayment plans like the government’s new Saving on a Valuable Education (SAVE) Plan. All plans adjust your payment to a percentage of your discretionary income and forgive any remaining loan balance if you haven’t fully repaid your federal loans at the end of the repayment period.
Likewise, teachers and certain public service employees working toward loan forgiveness under one of the programs offered by the government would no longer qualify for that benefit if they refinanced.
Finally, while many private lenders offer the ability to temporarily reduce or stop payments and avoid default through deferment or forbearance, terms may not be as generous compared with federal student loans.
If you want to retain access to perks such as SAVE or PSLF, avoid turning your federal student loans into a private one through refinancing. If reducing your interest rate and paying off your student loans as quickly as possible is more in line with your goal, however, refinancing could be worth exploring.
Private Student Loans
Unlike federal student loan borrowers, private loan borrowers did not get much of a break on their loan payments throughout the COVID-19 pandemic. Plus, they don’t have to worry about losing federal protections, since their private student loans already aren’t eligible for federal programs.
If you’re struggling with high interest rates on your private student loans, refinancing may be a way to lower them. If you’re waiting for rates to go down again to maximize savings, keep in mind that there’s no limit to how often you can refinance your student loans, and lenders typically don’t charge fees.