When Rates Go Down, Borrowers Save
Most student loan refi companies link their rate to the average prime rate of the big lenders or LIBOR.
The average prime rate tracked by the Wall Street Journal is usually three points higher than the Fed’s target rate. Currently, the prime rate is 3.25% and the Fed’s target rate is 0.25%. This is in stark difference to the start of March, when prime was 4.75% and the Fed 1.75%.
Despite its name, the London Interbank Offered Rate (LIBOR) also correlates strongly with the US Fed’s target rate. LIBOR is based on an average of how much banks charge each other for eurodollars, U.S. dollar-denominated deposits at foreign banks or overseas branches of American banks.
The Fed raised the target rate nine times between January 2016 to January 2019, bringing the rate from the record post-financial crisis low of 0.25 to 2.50%. The prime and LIBOR rates followed suit, and people with variable-rate private student loans or new private loans paid the price. Now, with the prime and LIBOR rates back at levels last seen following the financial crisis, student debt holders can once again refinance cheaply.
How Much Can You Save Now by Refinancing Your Student Loan?
Some lenders are slow to adjust their rates, so we won’t know the full effect of the Fed’s emergency cut for a month or two. However, it’s safe to say you can save money by refinancing your student loan in 2020.
In the year ending May 31, 2018, the average interest rate for borrowers using the Credible marketplace were:
- 6.17% for borrowers taking out 5-year variable-rate loans with a co-signer and beginning repayment immediately.
- 7.64% for borrowers taking out 10-year fixed-rate loans with a co-signer and beginning repayment immediately.
Currently, Credible is advertising APRs as low as 3.10% for a fixed-rate refinance and 2.09% for a variable-rate refi. Because all Credible’s partners are digital lenders, there are no origination fees, service fees, or prepayment penalties.
Likewise, Earnest is offering fixed rates starting at 4.25% and variable rates from 3.50%, much lower than a few months ago.
Thanks to the Fed’s emergency cuts, it’s possible these rates will go even lower in the next few months.
To understand what a lower APR can do for you:
- With a loan balance of $50,000 and remaining term of 7 years, each 1-point cut earns you additional lifetime savings of $2,400 to $2,600. For example, if you refinance from 6% to 3%, you earn $10,925 lifetime savings and $298 monthly savings.
- With a loan balance of $20,000 and remaining term of 5 years, each 1-point cut earns you additional lifetime savings of $540 to $550. For example, if you refinance from 6% to 3%, you earn $1,637 lifetime savings and $27 monthly savings.
Figuring Out if a Student Loan is Right for You
A student loan refinance is a new loan from a private lender that replaces your old private and/or federal and/or state student loans. The main reasons to refinance your student loans are to reduce your lifetime interest and monthly payment. All other things (fees, terms, etc.) remaining equal, the way to achieve this is with a better rate.
In 2019-20, the federal government lowered the fixed interest rate for undergraduate loans from 5.05% to 4.53%. Graduates with federal loan debt from 2011-13 were charged 3.4% APR, while graduates from 2006-8 were charged 6.8%. Therefore, graduates from 2006-8 have more to gain from refinancing federal loans. However, graduates from across the board could benefit from refinancing at 2020 rates.
Student loan refinancing is only offered by private lenders. The way a private lender determines a borrower’s rate is by looking at their individual risk profile, including credit score. To get the lowest rate, you’ll need to prove you have excellent credit and good income.
How to Secure the Best Student Loan Refinance as Rates Fall
Given what’s going on in the world right now, nobody can be certain where the economy and student loan rates will be a few months from now. But one thing we can be sure about is the near-zero Fed rates spell good news for holders of student debt. Here’s how to cash in and earn a student loan refinance at a discount.
- Take a fixed rate. Fixed rates start higher than variable rates, but they offer the security of having the same rate for the entire loan duration. With a fixed rate, you keep the benefit of rock-bottom rates even if this crisis (hopefully) ends and rates begin to recover.
- Shop around. With any lending product, the golden rule is to always shop around. Comparing 3-5 lenders is a great way of seeing what’s available now and what type of rate you specifically might qualify for.
- Use online lenders (or lending marketplaces). Aside from the great rates, one of the benefits of using an online student loan refinance provider is you can apply from home. This is particularly significant right now, when many Americans are in virtual lockdown at home.