• 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. If you have federal student loans: Federal student loans, which are loans owned by the Department of Education, come with borrower protections you’d lose if you refinance — like the interest-free payment pause, income-driven repayment plan and relief programs such as Public Service Loan Forgiveness. “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.” If you have a tight budget: Budgets with a little wiggle room or a cash cushion can stay afloat if your monthly payment rises with interest rates under a variable-rate loan. But if your current expenses take up most of your monthly income, you may want to avoid a variable interest rate. Brian Walsh, a certified financial planner and senior manager of financial planning at SoFi, describes how a low-interest, variable-rate loan may make sense financially, but for someone living paycheck to paycheck, what’s likely more helpful is the security and consistency of a fixed- rate loan. If you need a longer repayment term: Shorter repayment terms allow less time for interest rates to rise, compared with paying your loan off over 10, 15 or 20 years. Longer repayment periods could use the security and predictability of a fixed-rate loan, according to Walsh. Fixed rates will usually be the safer option, even if you anticipate rates falling soon. “After interest rates rise a lot, it’s natural to think it may be a good time to choose a variable rate,” says Eric Figueroa, a certified financial planner and founding wealth manager of Hesperian Wealth. “But no one can really predict the path of interest rates. What if they keep going up over the life of your variable-rate loan? Think of the consequences seriously.”

The article Is It Time to Refinance to a Variable-Rate Student Loan? was published on NerdWallet on December 15, 2022.

TREA BRANCH is a writer at NerdWallet.


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