When shopping for student loan refinance rates, you may encounter some very competitive interest rates. Refinancing your student loans to get a lower rate could make a difference to your life, but rates are shown in ranges, and the numbers on the higher end may not be worth it for you.
Arming yourself with knowledge about how student loan refinance rates are determined can help you understand your chances of locking in the interest rate you’re hoping for. Once you understand what goes into calculating your student loan refinance rate, you can take steps to set up the ideal scenario for you to refinance your student loans.
You can control some of the factors that go into student loan refinance interest rates, but some are just a matter of good timing. So, let’s take a closer look at the biggest factors that affect student loan refinancing rates and how you can plan accordingly. Then, you can use our student loan refinance calculator to explore what your new payment might be.
1. Credit Score and History
Your credit score is one of the biggest factors in determining your student loan refinance rate Generally speaking, the higher the credit score the lower the interest rate you can get.
Many students have what’s known as a thin credit file – or no credit history the first time they take out a loan. But as students begin making on-time student loan payments they begin to build their credit. And as time goes by, there may be other good marks on their credit report, for example from making on-time credit card or car payments. If you’ve been able to improve your credit score since you first took out the loan, you may be able to refinance with a lower interest rate. Additionally, if you can find a creditworthy cosigner, that can also open up the possibility for securing a lower student loan refinance rate.
Here are some tips to improve your credit score.
2. Market Factors
When researching student loan refinance interest rates, you’ll likely come across a choice of fixed and variable interest rates. Fixed interest rates will stay the same for the life of the loan, while variable rates fluctuate with the market index. This means that variable rates will go up or down to adjust to bank lending practices. Lenders will use a benchmark index rate to set their interest rate percentages. College Ave and other lenders use the Secured Overnight Financing Rate (SOFR) as their benchmark, which is the standard interest rate banks pay when lending money to each other. Previously many banks and lenders used the London Interbank Offered Rate (LIBOR), but that benchmark is being retired. Since rates will move up and down according to the market, you’ll want to make sure you refinance when rates are lower.
3. Loan Terms
First, consider the terms of your original loan or loans. Some private student loans may have pre-payment fees that could set you back. Remember, when you refinance your student loans technically, you are paying off your first loan early. Pre-payment fees could negatively affect the interest rate your new lender offers you. College Ave does not charge fees for early payment but your original lender may have.
Another thing to keep in mind is the length of your new loan term. Typically, the shorter the loan term you select, the lower the interest rate you will be offered but this could mean higher monthly payments. The longer the loan term, the higher the interest rate but likely the lower your monthly payment. You’ll need to decide what works best for your unique financial situation.
4. Income and Debt-to-Income Ratio
If you have a higher income than you did when you first took out your student loans, you may be able to qualify for a lower student loan refinance rate. This is a common scenario because many students take out their loans while going to school when they aren’t high earners. But once you have a diploma in hand and enter the workforce, your income can rise significantly. It’s worth exploring your refinance options if you’ve seen an increase in income recently.
Lenders will also pay close attention to your debt to income ratio or the ratio of monthly debt you have against your monthly income. Keeping a low debt to income ratio improves your chances of having a higher credit score and getting a lower student loan refinance rate.
Tip: Be careful when considering refinancing your federal loans. When you refinance federal student loans, you lose the ability to apply for income-based repayments, which could come in handy if your income should go lower.
How to Use a Student Loan Refinance Calculator
Now that you have a better understanding of how your student loan refinance rate is determined, you can explore what your new payment could look like by using our student loan refinance calculator. You can enter in your desired outcome — lower monthly payments or lower overall loan cost — as well as your credit score, loan term preferences, and information about your current loans to find out what your student loan refinance rate might be.
Learn more about when to refinance student loans.
