Is refinancing worth it for a 1% lower student loan rate now?

Student loan borrowers have had plenty of changes to navigate over the last few months, from shifts in federal repayment rules to program changes and movements in the rates available on private student loans. For student loan borrowers who are focused on lowering the cost of their student debt, though, one number may matter more than most: the interest rate they’re currently paying on their student loans.

That’s because student loan refinancing rates are competitive enough right now that some well-qualified borrowers may be able to shave a percentage point or more off their existing rate. As of mid-August, many fixed student loan refinancing rates ranged from about 4% to just under 11%, which could mean refinancing results in big savings for the right borrower.

But getting a student loan rate that’s 1% lower doesn’t automatically mean refinancing is the right move. The value can vary significantly based on how much you owe, how long you have left to repay it and what type of student loans you currently have. So, before replacing an existing loan with a new one, it helps to put that rate difference into context.

Find out how much more affordable your student loans could be today.

Is refinancing worth it for a 1% lower student loan rate now?

A 1% rate reduction can generate meaningful savings, particularly when you have a large student loan balance or years remaining on your repayment schedule. But whether those savings are enough to justify refinancing depends heavily on the specifics of your loan.

For example, let’s say you owe $50,000 and have 10 years remaining on your loan. At a 7% fixed interest rate, your monthly principal and interest payment would be about $581. Refinancing that same balance into a 10-year loan at 6% would reduce the payment to roughly $555. That’s a difference of only about $25 per month, but over 10 years, it would amount to over $3,000 in total savings.

The larger your student loan balance, the more significant the refinancing savings can become. A borrower refinancing $100,000 from 7% to 6% over the same 10-year period could save over $6,100 in total interest. Conversely, someone with a $25,000 balance and just five years remaining would save only about $700 by dropping from 7% to 6%.

Those calculations blockume the borrower keeps the same repayment timeline, though. Extending the student loan term while refinancing can further reduce the monthly payment, but it can also offset some or all of the interest savings generated by the lower rate. That’s why comparing the total repayment cost — not just the new monthly payment — is important.

The type of student loan debt you’re refinancing matters, too. If you have private student loans and can qualify for a lower fixed rate without substantially extending your payoff timeline, the tradeoffs may be relatively straightforward. Private loans don’t carry the federal protections that borrowers could lose by refinancing.

Federal student loans, on the other hand, require a different calculation. Refinancing them with a private lender removes them from the federal student loan system, which means giving up access to federal benefits and protections.

That can be particularly important to consider if you may need income-driven repayment, deferment or forbearance options in the future, or if you’re pursuing programs such as Public Service Loan Forgiveness. In that situation, saving one percentage point may not outweigh what you’re giving up, even if the dollar savings look attractive on paper.

Learn how much you could save by refinancing your student loans now.

How to decide whether a 1% lower rate is enough to refinance

Rather than using the 1% rate difference as a universal cutoff, it can be more useful to calculate what the new rate would actually do for your finances. Start by comparing your current loan’s remaining cost with the proposed refinancing loan. Look at the monthly payment, remaining repayment period and total interest under both options. Be especially careful if the student loan refinance offer comes with a longer term, since stretching repayment out for additional years can increase the total interest paid despite the lower rate.

You should also consider how stable your finances are. A borrower with strong emergency savings, steady income and private student loans may place more value on reducing interest costs. Someone with federal loans who expects their income to fluctuate may place greater value on retaining access to federal repayment protections.

And don’t blockume the first 1% reduction you’re offered is necessarily the best available deal, either. Student loan refinance rates vary considerably by lender and borrower profile, so comparing multiple offers can help determine whether you qualify for an even larger reduction. Some student loan refinance lenders are currently advertising fixed rates below 4% for highly qualified borrowers, though the lowest advertised rates won’t be available to everyone.

You should also consider your remaining balance and payoff timeline as part of the equation. If you’re already close to eliminating the debt, refinancing may produce relatively modest savings. But if you owe tens of thousands of dollars and have a decade or more left to pay off your student loans, even a seemingly small rate reduction can have a much larger impact.

The bottom line

Refinancing to a student loan rate that’s 1% lower can be worthwhile in some cases, but the rate difference alone doesn’t tell you enough to make the decision. Your balance, remaining loan term, new repayment period and loan type can all determine whether the savings justify making the switch. Before refinancing, calculate the total cost under both loans and consider any benefits you’d have to give up. That comparison can give you a clearer picture of whether a one-percentage-point reduction is substantial enough to make refinancing worthwhile right now.