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Student Loan Refinancing Rates are Rising: What To Do About It

The Federal Reserve recently announced a rate hike of half a percentage point — its largest increase in more than two decades. As a result, all types of debt are expected to become more expensive, and that includes student loans.

With student loan refinancing rates on the rise, now’s the time to consider your next move and figure out if you should move forward with student loan refinancing in 2023.

How much will student loan refinancing rates rise in 2023?

The actual increase in student loan refinancing rates is hard to pinpoint, but we do know there’s a good chance that rates will rise as the Federal Reserve increases its rate. Although private student loan rates don’t necessarily rely on the Fed, the reality is that when rates in general head higher, student loan rates follow suit.

So far, the Fed has raised its rate twice in 2022, and there are expectations that further rate hikes are on the horizon if inflation doesn’t slow. One of the purposes of the Federal Reserve is to try to control inflation, and raising interest rates — making it more expensive to borrow money — is one of the tools it uses.

If inflation doesn’t slow to a rate that the Fed finds acceptable, further rate hikes could be on the docket for later in the year, and that could mean further increases to student loan refinancing rates.

The current move targets the 0.75% to 1.0% range for the federal funds rate. There’s speculation that this rate could rise to the 2.75% to 3.0% range by the end of the year if the Fed finds it necessary. As a result, that could lead to higher refinancing rates by the end of 2023.

How to plan for rising refinancing rates

Because student loan interest rates can have a big impact on your monthly payment, as well as how much you repay overall, reducing what you pay is a big part of making sure that your finances remain on track. As you consider student loan refinancing, you need to take rates into consideration.

Planning for rising rates can be difficult, however, because each lender has its own rates and refinancing criteria. Some of the factors that impact the rate you receive include:

  • Credit score. The higher your credit score, the lower your refinancing rate is likely to be. If you can’t qualify for the best rate on your own, consider looking for a cosigner that can help you qualify for the lowest possible refinancing rate.
  • Variable vs. fixed rate. Whether your student loan refinancing rate is a variable or fixed rate also matters. In general, variable student loan refinancing rates are lower than fixed rates. However, one of the issues with variable rates is that they can rise when interest rates increase. You could wind up paying more over time — and your monthly payment can change.
  • Term length. With many lenders, a shorter-term loan results in a much lower interest rate. If you have a longer term, it’s seen as a greater risk and the rate you’re offered can be higher. However, this new development brings with it a possibility that longer-term rates might become more affordable, while shorter-term rates head much higher.

If you have a variable-rate loan, now might be the time to use a student loan calculator to determine whether you could benefit from refinancing to a fixed-rate term. Compare different offers to determine whether it makes sense for you to refinance now before interest rates head even higher.

When planning for higher student loan refinancing rates, you can also consider moves that will help you pay off your debt faster. When you pay down your debt, you have less to worry about when rates rise.

Should you refinance your student loans?

When deciding if you should refinance your student loans, the potential for rising rates is one part of the equation. You also have to weigh other risks, depending on the types of loans you have.

Federal student loans vs. private student loans

Just as private student loan rates are moving higher, there’s a chance that federal student loan rates will also head higher. However, federal student loan rates are determined by a different process set out by Congress and based on Treasury rates. But, because of the way student loans operate, they’re fixed at the time you get them, so even if federal loan rates drop, already-disbursed loans won’t be affected.

Here are some items to consider as you decide whether you should refinance federal student loans:

  • Compare interest rates. Does private student loan refinancing offer you lower interest rates? If you can get a lower rate — especially if the term is shorter — you could potentially save thousands of dollars in interest.
  • Consider the prospect of loan forgiveness. The Biden Administration has put off starting repayment, and student loan interest isn’t accruing during this time. However, payments are currently slated to restart in fall 2023. Weigh whether you think this debt will be forgiven, or if the payment pause will be extended. Once you refinance, you run the risk of losing out if federal loans are, indeed, forgiven.
  • Look at federal student loan benefits. Finally, once you refinance, you’re no longer eligible for federal loan benefits like income-driven repayment, Public Service Loan Forgiveness, and automatic payment pauses like the one we’re seeing now. If you don’t think you’ll need these benefits, refinancing at a lower rate might make sense.

In some cases, it can make sense to consolidate your federal student loans separately from refinancing any private student loans you have.

Do you want a fixed payment?

With federal Direct Loan Consolidation, you’ll have the same payment each month, and depending on your repayment plan, could potentially receive forgiveness down the road.

Private student loans are a different matter. Review your loan terms to see if you currently have a fixed or variable rate. Variable rates for shorter terms have been rock-bottom for a few years, but that could change with rising student loan refinancing rates. If you want a fixed payment that remains affordable and doesn’t change, now might be the time to refinance.

Get help with your student loan options

If you’re not sure whether to refinance your student loans in a rising rate environment, speak with one of our student loan experts. They can help you compare rates, look at federal benefits and decide how to proceed in a way that benefits you in the long run.

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