Should You Refinance to a Variable-Rate Student Loan?

When you refinance your student loans, a private lender pays off your current loans and replaces them with a new loan, which includes new terms. Typically, you can choose the type of interest rate on your refinance loan—fixed or variable. 

Fixed interest rates remain unchanged throughout the loan term, so your monthly payment is consistent. Meanwhile, variable interest rates fluctuate because they are connected to market conditions. Because of that, your monthly payment can change. 

Federal student loans have fixed interest rates, while most private loans can have variable or fixed rates. But you can refinance either type of loan to a variable rate. Here’s how to determine if a variable interest rate makes sense for you.

Should you refinance a fixed-rate student loan to a variable rate?

When you have a fixed-rate loan, your monthly payment stays the same throughout your repayment term. For example:

• If you refinance to a 15-year repayment term
• With a fixed 7% interest rate and a $200 monthly payment. 
• Your loan payment is $200 per month for 15 years. 

Variable interest rates change throughout the repayment term, causing your monthly payment to fluctuate as often as every month. The rates can increase or decrease depending on the market and, with it, your payment. 

For example, 

• You refinance your loan with a 7% variable interest rate and a 15-year repayment term. 
• Your monthly payment is $200. 
• A year later, interest rates increase to 9%, and your payment increases to $325. 
• A few months later, the Federal Reserve adjusts the rates again, increasing your payment by another $50. 
• Your new loan payment is now $175 higher than when you originated the loan.

There are two types of student loans—federal and private—and you can refinance both. But there are notable differences. 

• Federal student loans: The government funds these loans, and interest rates are fixed. Borrowers can access student loan forgiveness options and income-driven repayment. 
• Private student loans: Private lenders fund these loans, and interest rates can be fixed or variable. Borrowers cannot utilize federal student loan forgiveness or income-driven repayment

When it makes sense to refinance a fixed-rate student loan to variable

Depending on the market conditions, variable interest rates might be higher or lower than fixed rates. A refinance usually makes sense if you get a lower rate or better terms. Here’s when to consider it. 

Consider refinancing to a variable rate if you …

✅ Improved your credit score

✅ Will pay off your debt quickly

✅ Have private student loans

✅ You’ve improved your credit profile

Your credit score impacts your loan terms for private student loans. If your score has increased since getting your loans, you might be able to secure a lower rate if you refinance to a variable-rate student loan. 

Consider completing the prequalification process with a few lenders to view potential terms before applying. 

✅ You plan to pay off your debt quickly

Variable interest rates can fluctuate throughout the repayment term, meaning they might increase. But it won’t matter if rates increase if your loan is already paid off. Choosing the lowest rate—whether fixed or variable—can make sense if you plan to pay back your loans ahead of schedule. 

✅ You have private loans

You lose access to the perks of federal loans, like income-driven repayment and student loan forgiveness programs, when you refinance your loan. Private loans do not provide extra perks, so you won’t lose any if you refinance to a variable rate. 

When to reconsider a fixed- to variable-rate student loan refinance

Refinancing from a fixed-rate student loan to a variable-rate student loan only sometimes makes sense. You might want to stick with a fixed rate in the following scenarios. 

Reconsider refinancing to a variable rate if you …

❌ Have federal student loans

❌ Have a low rate

❌ Are close to paying off your loans

❌ Are on a tight budget

❌ You have federal student loans

Federal student loans offer valuable perks like Public Service Loan Forgiveness for eligible employment and loan discharge due to permanent disability. You can no longer access those perks once you refinance. 

❌ You have a low rate

Most people refinance to a variable rate to secure a lower interest rate. Compare current rates from multiple lenders. It makes financial sense to refinance if you can get a lower rate. 

❌ Your loans are almost gone

Student loans usually have terms of at least five years. Because of that, a variable-rate refinance usually doesn’t make sense if your loans are nearly gone. Even if you get a lower interest rate with a refinance, extending the repayment term will cost more overall. 

❌ You have a tight budget

Variable interest rates can fluctuate, which means that the monthly payment might increase at some point during the repayment term. If you have a tight budget, the increase might cause financial stress. 

Ask the expert

Jim McCarthy

CFP®

In the current interest rate environment, it really doesn’t make sense to refinance federal student loans to private loans as you give up the perks of the federal loans and private loan interest rates are generally higher. Also, if the current private loans are at a rate below current rates (variable or fixed), it also doesn’t make sense. It would make sense if a current private loan has an interest rate that refinancing can lower. Variable-rate loans might make sense currently as I think interest rates will likely drift slowly lower over the next couple of years.

Should you refinance a variable-rate student loan to another variable rate?

If you already have a variable-rate student loan, you can refinance it to a new variable-rate loan. Borrowers typically refinance to get a more competitive interest rate. 

You might be able to lower your rate by refinancing one variable-rate loan to another. But it depends on when you applied for the original loan. 

Lenders consider borrower credit scores and Federal Reserve rates when determining loan terms. If rates decrease, your interest rate will also decrease since it’s variable, so you don’t need to refinance to access the lower rate. It’s one of the benefits of variable-rate student loans. 

But there are instances when it makes sense to refinance a variable-rate loan to a new variable-rate loan with a different lender. Here’s what you need to know. 

	Refinance to a new variable rate loan?
Your credit score increased	✅
You’re unhappy with your current lender	✅
You have a specific financial goal	✅
You want more stability	❌
You’re looking for a quick fix	❌
You want a longer repayment term	❌

When it makes sense to refinance a variable-rate student loan to a new variable-rate loan

It might make sense to refinance a variable-rate student loan to a new variable-rate student loan, but it’s essential to review your finances and goals before doing so.

✅ Your credit score increased

Variable rates can fluctuate with the market throughout your repayment term. But your credit score, income, and other factors determine your initial rate, which is the rate you agree to when you begin the loan. 

You might get a better variable rate with a different lender if you’ve increased your salary or improved your credit score. If so, it can make sense to refinance. 

✅ You’re unhappy with your current lender

Not every lender is the right fit for every borrower. It might be a good idea to refinance your variable-rate student loan to a new variable-rate loan with a different lender if you want to switch. 

However, comparing rates between the two lenders before doing so is crucial. Refinancing could cost you more if you can’t get a rate that is the same or lower than your current one. 

✅ You have a specific financial goal

Refinancing to a new variable-rate student loan can make sense if you have a particular goal and are committed to achieving it. For example, you may want a shorter repayment term and plan to become debt-free faster. 

Or perhaps you’re interested in a lower monthly payment to save more for a home purchase. Refinancing might be good if you review your finances and understand the potential risks. 

When to reconsider a variable-to-variable-rate student loan refinance

Even though variable-to-variable refinances can make sense in some situations, it’s not always the best option. Here’s when you might want to avoid refinancing to a new variable-rate student loan.

❌ You want more stability

Refinancing a variable-rate loan to a new variable-rate loan will not provide additional stability. Your interest rate and monthly payment can still fluctuate as the market changes. If you want extra stability, consider a fixed-rate refinance. 

❌ You’re looking for a quick fix

It might seem like refinancing will help your finances, especially if you can get a lower rate. However, rates fluctuate, and it might be better to contact your current lender and discuss potential options if you need help. 

❌ You want a longer repayment term

Variable interest rates fluctuate, which means that fixed rates are usually a better fit if you want a longer repayment term. Over time, you are more likely to benefit from a fixed rate and save money. 

If you feel interest rates will remain the same or go lower, then variable-rate loans make sense. Variable rates are a bigger risk—but also a potential benefit.

Jim McCarthy

CFP®

How to refinance a student loan

The refinance process is nearly identical for variable-rate and fixed-rate student loans. Plus, many lenders offer both types of loans, making it easier to compare offers and find the best fit. 

1. Research lenders: To find the best lender, consider each lender’s reputation, current rates, fees, unique perks, and customer support.
2. Get prequalified: Based on general information about you and your finances, lenders can give you an idea about the loan size and rate you can get within a few minutes. It’s not an official offer and doesn’t require a hard credit check, but it’s a good way to learn more about each lender.
3. Compare offers: Once you have potential offers from multiple lenders, compare the terms and determine which is best. Review the interest rate, term length and fees. 
4. Finalize the application: Select a lender and finalize the application. Finalizing the application involves a hard credit check and providing proof of identity. 

Refinancing FAQ

How does refinancing student loans to a variable rate affect your credit score?

Lenders often conduct a hard credit check when you refinance student loans to a variable rate. This can decrease your credit score by a few points. However, regular, on-time payments on your new loan can help improve your credit score over time.

Should you refinance federal student loans to a lower variable rate?

There’s no one-size-fits-all answer to this. Whether to refinance federal student loans to a lower variable rate depends on your circumstances. With a variable rate, the interest rate may go up or down over time in response to changes in market conditions. This comes with risks and rewards. 

It could be beneficial if you’re out for a lower initial interest rate or lower payments. However, if interest rates rise in the future, your payments could increase. 

Also, when you refinance federal student loans, you lose access to federal benefits, such as income-driven repayment plans and loan forgiveness programs. It’s crucial to weigh the potential savings against these risk factors.

How might current economic trends, such as rising or falling interest rates, affect the decision to refinance?

Current economic trends can greatly influence the decision to refinance student loans. If the economy is trending toward lower interest rates, choosing a variable-rate loan when refinancing could save you money.

However, if indications are for rising interest rates, choosing to refinance with a variable-rate loan could increase your interest costs over time. 

So when contemplating refinancing with a variable rate loan, it’s essential to monitor the economic trends, especially the factors that might affect interest rates. Stay informed to make the best decision based on your personal financial situation.