Editor’s Note: This article covers the strategies borrowers can use to convert their variable-rate federal and private loans into fixed-rate loans. For a more general discussion on inflation, check out this article on how inflation impacts borrowers.
Sometimes the variable part of a variable-rate loan is a good thing. When interest rates get slashed, and payments drop, borrowers rarely complain.
Unfortuantely, during times of inflation, interest rates move in the other direction. Lenders charge more interest each month, and monthly payments increase. At a time when everything else is getting more expensive, a growing student loan bill is especially devastating.
If there is good news in this situation, it is the fact that many borrowers can prevent interest rate increases. The process is different for federal and private loans, but in both cases, borrowers can lock in a fixed-rate loan.
Lenders Won’t Help with Variable-Rate Increases
Before jumping into the solution, it is important to point out a common borrower strategy that does not work.
Many people call their lender to request help or ask that the interest rate not be changed. It is a reasonable question, but the lender has no incentive to help. The original student loan contract defines the interest rate terms. When the index rate increases, the interest rate on the student loan will also increase.
The lender or servicer will usually tell the borrower that there is nothing they can do. This is a half-truth. The lender can’t do anything, but the borrower usually can address the issue.
Getting a Fixed Rate on Federal Student Loans
The process for federal borrowers to lock in a fixed rate on their variable-rate loans is relatively simple.
The solution is federal direct consolidation.
When borrowers consolidate their federal loans, the new consolidated loan is a fixed-rate loan. The exact interest rate is the weighted average of the original loans rounded to the nearest 1/8%. In other words, the combined interest rate should stay almost identical, but it converts variable-rate debt into fixed-rate debt.
It is also worth noting that the federal government last issued variable-rate loans in 2006. If your student loans are newer, it either means they are fixed-rate, or they are private.
Some Caution is Required: Consolidation is a significant change to your federal loans that can have lasting consequences. Before consolidating, make sure you understand the impact on your loans.
Refinancing to Change a Variable-Rate Student Loan into a Fixed-Rate Loan
For private loan borrowers, the only path to a fixed-rate loan is to refinance.
In a student loan refinance, a refi lender will pay off your existing variable-rate loans. In return, the borrower agrees to repay a new student loan with the refi lender. The borrower gets a new student loan with better terms, and the refi lender gets a new customer.
The downside to refinancing is that not all borrowers can qualify. Refinance lenders target borrowers with solid income and credit scores.
However, refinancing can mean significant savings for borrowers with a strong credit profile. A college graduate with a job is a much safer bet than a student without a degree and without a job. As a result, the refi lenders can offer much better loan terms to the borrower.
Refinance Warning: Borrowers with federal student loans can technically refinance their loans into a private loan. However, this move isn’t advised for most borrowers.
Refinancing is safest for borrowers with private loans.
Tips for Getting the Best Fixed-Rate Loan in a Student Loan Refinance
The key to any student loan refinance is to shop around.
Shopping around is essential because each refinance lender uses a different formula for deciding who gets what rate. Because these lending formulas are closely guarded secrets, the only way for a borrower to know where they stand is to apply.
This might sound tedious for borrowers, but checking rates with a lender usually takes less than 10 minutes. As long as you do you rate shopping within a 30-day window, it won’t impact your credit score.
If you are looking for the lowest possible rate on a fixed-rate loan, a 5-year loan is the best option. As of May 2022 the following lenders offer the best rates:
For the borrowers looking for the lowest monthly payment, a 20-year fixed-rate loan is the best choice. Interest rates start a bit higher, but the monthly payments are much lower because the borrower has so long to repay the loan.
In May 2022, the following lenders advertise the best 20-year fixed-rate loans: