Inflation and rising interest rates will likely eat into your budget. It’s natural to search for ways to save money on student loans.
“With interest rate rises and other pressures from inflation on household budgets, it’s time to reassess your student loan terms,” Angela Colatriano (chief marketing officer at College Ave Student Loans) said in an email interview.
Refinance student loans — trade in your existing loans for a newer one with a lower interest — can lower your monthly payments or total payment.
Variable-rate loans have a higher interest rate and a lower monthly payment than fixed-rate loans, which are locked in for the entire term. Variable-rate loans are more risky, especially if you have a tight budget.
When is it a good idea to refinance a variable-rate student loans?
Variable-rate loans have variable interest rates, so it is best to refinance when rates drop.
Variable-rate refinances are possible with private student loans. Lenders offer them based upon your income, credit score, and debt load. Kristen Ahlenius is an accredited financial counselor and director for education at Your Money Line. This platform offers financial wellness services. If you have a better credit score or earned more, refinancing now may offer you lower rates.
Ahlenius mentions that a variable-rate student loan is a good option for those who earn a lot or are looking to quickly pay off student loans. If you can get a lower interest rate, and pay off your student loans quickly, you could save a lot of money.
Refinance to a variable rate loan can be done by a few people:
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Talk to your lender about how often your interest rates can change and what your rate could rise. This is also called the variable-rate cap.
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Make a plan for your budget. This includes what expenses you can reduce in the event that interest rates rise. This will affect your monthly payment
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Refinance in the future if rates or your financial situation changes.
How to avoid refinancing to variable-rate loans
Sometimes, even the lowest interest rate is not worth the uncertainty associated with a variable-rate student loans. These are some situations in which you might want to avoid refinancing a variable-rate student loan.
Federal student loans are available to you if you qualify for the President Joe Biden’s student loan cancellation.
Ahlenius says, “It is really difficult to argue for refinance if your are in the federal area.” “Ninety nine out of 100 times, don’t leave the protections federal government span>
If you are on a tight budget, a flexible budget or cash cushion will help you stay afloat even if your monthly payments rise due to variable-rate loans. If your monthly expenses exceed your income, you might want to avoid variable interest rates.
Brian Walsh is a certified financial advisor and senior manager for financial planning at SoFi. He describes how a low interest, variable-rate loan might make financial sense, but that for someone who lives paycheck to paycheck, it’s more beneficial to have a fixed-rate loan.
You may need a longer repayment period if you have a higher interest rate. Paying your loan off over 10 to 15 years will allow the interest rates to rise faster. Walsh claims that longer repayment terms could provide the predictability and security of a fixed rate loan.
Fixed rates are usually safer than variable rates, even though you expect rates to fall soon.
Eric Figueroa is a certified financial planner who founded Hesperian Wealth. He says that interest rates have risen a lot and it’s normal to believe it might be a good idea to switch to a variable rate. But no one can predict the trajectory of interest rates. What happens if interest rates keep rising over the term of your variable rate loan? .”