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

Refinancing to a variable-rate student loan can save you money upfront, but it can be more costly in the long run.
Trea Branch
By Trea Branch 
Edited by Karen Gaudette Brewer

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Soaring inflation and interest rates are likely taking a chunk out of your budget. So it’s only natural to look for ways to save money, especially on student loans.

“With interest rates rising and other pressures on household budgets from inflation, it’s a good time to reassess whether your current student loan terms are the best financial fit for you,” said Angela Colatriano, chief marketing officer of College Ave Student Loans, in an email interview.

Refinancing your student loans — trading in your current loans for a new one, ideally with a lower interest rate — can lower your monthly payment or total overall payment.

But the interest rate and monthly payment on a variable-rate loan can change, compared to a fixed-rate loan where interest rates are locked in for the life of the loan. This makes variable-rate loans riskier, especially if your budget is already tight. 

When does it make sense to refinance to a variable-rate student loan?

Because the interest rate on variable-rate loans can change, it’s best to refinance when rates fall. 

Private student loans are ideal for a variable-rate refinance because lenders offer them based on criteria like your credit score, income, and current debt load. These are characteristics you likely were still developing if you took the loans out while in school, according to Kristen Ahlenius, an accredited financial counselor and director of education at Your Money Line, a workplace financial wellness platform. Refinancing now could land you better rates if you earn more or your credit has improved since leaving school. 

A variable-rate student loan can also be an attractive option for high earners or those looking to pay down their student loans aggressively, mentions Ahlenius. You could save big if you snag a lower interest rate and pay off your student debt fast

If you choose to refinance to a variable-rate loan, you can do a few things to make it work in your favor:

  • Contact your lender to understand how often your interest rate can change and how high your rate can rise, also known as the variable-rate cap.

  • Have a plan for your budget, like what expenses you can cut in case interest rates rise — affecting your monthly payment.

  • Consider refinancing in the future as rates or your financial situation change.

When to avoid refinancing to a variable-rate loan

Sometimes even the lowest interest rate may not be worth the uncertainty of a variable-rate student loan. Here are a few situations where you may want to avoid refinancing for a variable rate.

If you have federal student loans: Federal student loans, which are loans owned by the Department of Education, come with borrower protections you’d lose if you refinance — like the interest-free payment pause, income-driven repayment plan, relief programs such as Public Service Loan Forgiveness and eligibility for President Joe Biden’s student debt cancellation.

“I find it really hard to argue for a refinance if you are in the federal space,” says Ahlenius. “Ninety-nine out of 100 times, do not leave the protections of the federal government.”

If you have a tight budget: Budgets with a little wiggle room or a cash cushion can stay afloat if your monthly payment rises with interest rates under a variable-rate loan. But if your current expenses take up most of your monthly income, you may want to avoid a variable interest rate.

Brian Walsh, a certified financial planner and senior manager of financial planning at SoFi, describes how a low-interest, variable-rate loan may make sense financially, but for someone living paycheck to paycheck, what’s likely more helpful is the security and consistency of a fixed-rate loan.

If you need a longer repayment term: Shorter repayment terms allow less time for interest rates to rise, compared with paying your loan off over 10, 15 or 20 years. Longer repayment periods could use the security and predictability of a fixed-rate loan, according to Walsh.

Fixed rates will usually be the safer option, even if you anticipate rates falling soon.

“After interest rates rise a lot, it’s natural to think it may be a good time to choose a variable rate,” says Eric Figueroa, a certified financial planner and founding wealth manager of Hesperian Wealth. “But no one can really predict the path of interest rates. What if they keep going up over the life of your variable-rate loan? Think of the consequences seriously.”

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