Is It Time to Refinance to a Variable-Rate Student Loan?

Updated on January 3, 2023

Explore options to save money on student loans with refinancing. Switching to a new loan with a lower interest rate can lower monthly payments or overall payment amount. However, be aware that a variable-rate loan may fluctuate in interest, while a fixed-rate loan has a consistent rate. Consider refinancing to a variable-rate loan when interest rates are falling and you have good credit, a high income, and a plan to aggressively pay off debt. Avoid refinancing to a variable-rate loan if you have federal student loans, a tight budget, or a long repayment term.

Questions Answered in this Article

What is refinancing and how does it work? Refinancing is the process of replacing your current student loans with a new loan that has a lower interest rate. This can help reduce your monthly payments or overall payment amount.
When is it a good idea to refinance to a variable-rate student loan? It may be a good idea to refinance to a variable-rate student loan when interest rates are falling and if you are able to secure a lower interest rate and pay off your loans quickly.
When should you avoid refinancing a variable-rate loan? You may want to avoid refinancing to a variable-rate loan if you have federal student loans, have a tight budget, or need a longer repayment term.
What are the pros and cons of refinancing to a variable-rate student loan? Pros of refinancing to a variable-rate student loan include the potential for a lower interest rate and the ability to pay off debt quickly. Cons include the uncertainty of fluctuating interest rates and the potential for higher monthly payments.
What should you consider before refinancing a variable-rate student loan? Before refinancing to a variable-rate student loan, you should understand how often your interest rate can change and what the variable-rate cap is, have a budget plan in place, and consider whether refinancing is the right decision based on your financial situation and goals.

Summary

Refinancing involves replacing your current student loans with a new loan that has a lower interest rate
Variable-rate loans may have a lower interest rate in the short term, but the interest rate can fluctuate
Federal student loans come with borrower protections that may be lost if you refinance
If you have a tight budget, a variable-rate loan may not be the best choice because an unexpected increase in your monthly payment due to rising interest rates could be difficult to manage
If you need a longer repayment term, a fixed-rate loan may offer more security and predictability
Pros of refinancing to a variable-rate student loan include the potential for a lower interest rate and the ability to pay off debt quickly
Cons of refinancing to a variable-rate student loan include the uncertainty of fluctuating interest rates and the potential for higher monthly payments
Before refinancing to a variable-rate student loan, you should understand how often your interest rate can change, have a budget plan in place, and consider your financial situation and goals.

Refinancing Your Student Loans: The Pros and Cons of Variable-Rate Loans

With rising inflation and interest rates potentially affecting your budget, it may be a good idea to explore ways to save money on your student loans. One option to consider is refinancing, which involves replacing your current loans with a new one that has a lower interest rate. This can help reduce your monthly payments or overall payment amount. However, it’s important to be aware that the interest rate and monthly payment on a variable-rate loan can fluctuate, whereas a fixed-rate loan has a fixed interest rate for the duration of the loan. This means that variable-rate loans may be riskier, especially if you have a tight budget.

When to Consider Refinancing to a Variable-Rate Loan

When it comes to refinancing your student loans, you may be considering switching to a variable-rate loan. But when is the best time to make the switch? According to Kristen Ahlenius, an accredited financial counselor and director of education at Your Money Line, a workplace financial wellness platform, it’s generally best to refinance to a variable-rate student loan when interest rates are falling.

Private student loans are often a good option for refinancing to a variable-rate loan because these loans are based on factors such as your credit score, income, and current debt load. If you took out your student loans while still in school, it’s possible that your credit score, income, and debt load have changed since then, making you a more attractive borrower and potentially allowing you to secure a lower interest rate through refinancing.

Variable-rate student loans may also be a good fit for high earners or those who are looking to aggressively pay off their student debt. If you’re able to secure a lower interest rate and pay off your loans quickly, you could save a significant amount of money.

If you do decide to refinance to a variable-rate student loan, there are a few things you can do to make the most of your decision:

Contact your lender to understand how often your interest rate can change and what the variable-rate cap is (i.e. the highest your rate can rise).
Have a budget plan in place in case of interest rates rise, which could affect your monthly payment.
Consider refinancing in the future if rates or your financial situation change.

Overall, refinancing a variable-rate student loan can be a smart financial decision, especially if you’re able to secure a lower interest rate and pay off your debt quickly. Just be sure to do your research and have a plan in place to manage potential changes in interest rates.

When to Avoid Refinancing to a Variable-Rate Loan

When considering refinancing your student loans, it’s important to consider whether a variable-rate loan is the right choice for you. While variable-rate loans may offer a lower interest rate in the short term, they come with the uncertainty of fluctuating rates. There are a few situations in which you may want to avoid refinancing for a variable rate:

If you have federal student loans: Federal student loans come with borrower protections that you may lose if you refinance, such as the option to pause payments interest-free, income-driven repayment plans, and eligibility for debt forgiveness programs. In most cases, it’s best to keep these protections by not refinancing.
If you have a tight budget: If you have little wiggle room, a variable-rate loan may not be the best choice. If your monthly expenses are already taking up most of your income, an unexpected increase in your monthly payment due to rising interest rates could be difficult to manage.
If you need a longer repayment term: If you’re planning to pay off your loan over a longer period, such as 10, 15, or 20 years, a fixed-rate loan may offer the security and predictability you need. Even if you expect interest rates to fall in the near future, a fixed-rate loan may still be the safer option.

In general, it’s essential to weigh the pros and cons of variable-rate and fixed-rate loans before making a decision. If you’re unsure which type of loan is best for you, speaking with a financial planner or loan officer may be helpful.

Things to Consider Before Refinancing to a Variable-Rate Loan

When considering refinancing a variable-rate loan, there are several things to consider.

First and foremost, it is important to understand how often the interest rate can change and what the variable-rate cap is. This information can usually be obtained by contacting your lender. The frequency of rate changes and the cap on those changes can have a significant impact on the overall cost of your loan. For example, if the interest rate can change every month and the cap is high, you could end up paying significantly more in interest over the life of the loan compared to a fixed-rate loan with a lower interest rate.

Another important consideration is having a budget plan in place in case interest rates rise. With a variable-rate loan, the interest rate can fluctuate, which means your monthly payments could also fluctuate. It is important to make sure you have enough room in your budget to accommodate higher payments if necessary. This can help you avoid falling behind on your payments and potentially damaging your credit score.

Finally, you should consider refinancing if rates or your financial situation changes. If interest rates drop significantly, you can refinance to a lower fixed-rate loan, saving you money in the long run. Similarly, if your financial situation changes, such as receiving a raise or paying off other debts, you may be in a better position to qualify for a lower interest rate.

In summary, before refinancing to a variable-rate loan, it is essential to understand how often the interest rate can change, have a budget plan if interest rates rise, and consider refinancing if rates or your financial situation change. By considering these factors, you can decide whether a variable-rate loan is right for you.