When refinancing student loans, who chooses an adjustable rate loan and why?


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When you refinance student debt, choosing between a fixed or variable rate loan can feel a bit like rolling the dice.

You are likely to get a lower interest rate initially with an adjustable rate loan. But your rate can go up or down as you pay off your debt, depending on economics that are hard to predict.

In this analysis, we look at historical Credible market data to learn more about who chooses an adjustable rate loan when refinancing student loans and why.

Main conclusions:

Short-term rates fall

Variable rate student loans are usually tied to a short-term index rate like the prime rate or the London Interbank Offered Rate (LIBOR). When economic conditions are tough, the Federal Reserve and other central banks cut short-term rates. But when the economy is booming, rates often go up.

When you take out a variable rate loan, the lender adds a margin to the index to which your loan is linked. The margin depends on your creditworthiness, the type of loan and the repayment term. Your margin does not change, but the index may go up or down, and your interest rate and monthly payment may go up or down. There is often a limit to your rate increase, but you may not reach your lender’s rate cap until your interest rate hits double digits.

This graph shows that since the summer of 2019, the short-term interest rates that serve as indexes for variable rate student loans have fallen by more than 2 percentage points. So if you have taken out a variable rate loan linked to LIBOR or prime rate in the past few years, you would have a lower rate today.

Keep in mind: That doesn’t mean rates won’t rise again in the future, but the Federal Reserve has signaled that it won’t raise rates in the short term until the employment rate drops significantly and inflation does. will not become a concern.

How popular are variable rate loans?

The chart above shows that when it comes to refinancing student loans, variable rate loans can fall in popularity over time. Between 2016 and 2018, when strong economic growth prompted the Federal Reserve to start raising short-term interest rates, variable rate loans began to fall out of favor for refinancing student loans.

The share of variable rate student loan refinancing initiated through the Credible marketplace has more than halved, from 36.2% in 2016 to 15.4% in 2018.

But when interest rates started to fall in 2019 and 2020, more borrowers began to view variable rate loans as a promising avenue for refinancing student loans.

So far this year: Variable rate loans represent more than one in five (20.5%) of student loans refinanced through Credible.

By comparison, only about 2% of mortgage applications are for adjustable rate mortgages.

How much better will my initial rate be?

The rate you might qualify for when refinancing student debt will largely depend on three factors:

  • Your credit rating
  • How long will it take you to repay your loan (loan term)
  • Your type of loan (fixed vs variable)

The chart above shows that in the past 12 months, borrowers who refinance student loans through the Credible Market have obtained the biggest break on a variable rate loan when choosing the shortest loan term offered – 5 years.

While it may seem that the benefit you get from choosing an adjustable rate loan wears off when you choose a longer loan term, there is another factor to keep in mind. Borrowers who choose variable rate loans with longer repayment terms tend to have lower credit scores than those who choose fixed rate loans. You can hover over the bars of the graph to see the credit scores.

Variable rate loans are popular for quickly repaying loans

The chart above shows that in general, variable rate loans are more popular with borrowers looking to pay off student debt quickly. On two-thirds of borrowers (68.5%) who refinance their student debt with a variable rate loan chose a repayment term of 12 years or less, while 68.3% of those who choose fixed rate loans will take 8 to 20 years to repay their loans.

Who is pursuing this strategy?

Refinancing your student loan debt into a loan with a shorter repayment term can help you get a lower interest rate. But it could also mean larger monthly payments. The graph above shows that borrowers who choose variable rate loans tend to have higher salaries and smaller loan balances compared to those who choose fixed rate loans.

This is especially true for borrowers with graduate degrees refinanced into variable rate loans, who refinanced an average of $ 80,117 in debt, with an average income of $ 144,180.

Almost half of the borrowers (46.1%) who chose a variable rate loan when refinancing student debt had a graduate degree. Graduate degree holders accounted for about the same proportion (45.1%) of all student loan refinances.

See: Should I switch to a variable rate student loan?

No prepayment charge to refinance again if you change your mind

While the decision to refinance your student loans to a fixed or variable rate loan is an important one, you are not necessarily stuck with it. If rates start to rise, you won’t have to pay a prepayment charge if you decide to refinance again with a fixed rate loan.

Lenders are prohibited by law from charging prepayment fees on student loans, and none of Credible’s student loan refinancing partner lenders charge any application or origination fees.

About Credible
Credible is a multi-lender marketplace that allows consumers to discover the financial products best suited to their unique circumstances. Credible’s integrations with major lenders and credit bureaus allow consumers to quickly compare accurate and personalized loan options – without putting their personal information at risk or affecting their credit score. The Credible Marketplace offers an unmatched customer experience as evidenced by over 3,800 Trustpilot positive reviews and a 4.7 / 5 Octoberscore.

About the Author

Matt Carter

Matt Carter is an expert in student loans. The analytical articles he contributed to have been featured by CNBC, CNN Money, USA Today, The New York Times, The Wall Street Journal, and The Washington Post.

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