Is it time to refinance a variable-rate student loan?

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.

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?

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.

“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.”