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How Inflation Changes the Student Loan Refinance Math

Oustside of a couple exceptions, most borrowers will want to steer clear of student loan refinancing while interest rates are high.

Written By: Michael P. Lux, Esq.

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Interest rates are high throughout the economy, including with student loan refinance lenders.

Not long ago, refinancing offered a path to significantly reduced monthly payments and lower interest rates. Today, the best refinance rates now hover around 5%.

With high interest rates and federal policy changes, refinancing is no longer the shortcut that it used to be. Refinancing is still helpful in certain circumstances, but these cases are the exception rather than the rule.

Sticking with Federal Student Loans Rather than Refinancing

Federal student loans are almost always preferable to private loans. The creation of the new SAVE plan and expansion of loan forgiveness further tilts the scale in favor of federal loans.

Back when refinance rates hovered around 2%, some high-earners faced a difficult decision: do I refinance for a reduced interest rate, or do I stick with the many protections of federal loans?

Today, the interest rates on most federal loans are as low, if not lower, than the best available refinance rates. As a result, the decision is relatively easy for most borrowers.

Fewer Refinance Options

High interest rates are not the only problem for borrowers considering refinancing.

In the current economy, not only are interest rates high, but capital availability is low. In other words, lenders have less money to lend.

Getting approved for a preferred interest rate has become more difficult for borrowers. Feedback from readers of this site appears to confirm that refinance lenders have gotten pickier about who gets approved for a refi loan.

The Exception to the Rule

In a time of high interest rates and inflation, one group of borrowers should seriously consider refinancing: those with variable-rate student loans.

The higher interest rates climb, the more expensive variable-rate student loans will become.

Trading a fixed-rate loan for a variable-rate loan protects borrowers from future interest rate growth.

As of June, 2024, the following lenders offer the lowest interest rates on fixed-rate refinance loans:

RankLenderLowest RateSherpa Review
1Earnest4.99%Earnest Review
2Splash Financial5.09%*Splash Financial Review
3ELFI5.48%ELFI Review

If interest rates decline in the future, borrowers can refinance a second or third time. Unlike refinancing a mortgage, refinancing student debt takes very little time, and crucially, there are no transaction costs.

Sherpa Note for Federal Borrowers: A few federal loans still exist with variable rates. These loans were last issued in 2006.

Federal borrowers with variable-rate loans do not need to refinance with a private lender. They can consolidate their federal loans to secure a fixed-rate federal loan.

Timing is Critical When Refinancing

Refinancing isn’t necessarily a bad idea. Exchanging one private loan for another private loan with a lower interest rate is almost always a win.

However, refinancing doesn’t make much sense when refinance rates are high and existing student loan rates are low.

In the coming years, this math might change. If interest rates drop in the future, the high interest loans that students borrow today might become great candidates for a refinance.

For now, refinancing is an option of limited benefit for most borrowers.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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