Student Loan Series: Refinancing Private, Variable Rate Loans

I, like 44.2 million other Americans, have student loan debt. Student loans are a fact of life for 77% of graduates from a four-year institution. So if you also have student loans, you are far from alone. Now that you hopefully feel slightly better about your debt, how can we make a plan to pay it off?

Below is one of the multiple scenarios that you may find yourself in as a graduate with student loan debt.  If this situation doesn’t apply to you, stay tuned.  I’m going to be addressing several scenarios over the course of the student loan blog series.

Check out Scenario #1: Jane has the following student loans financed through Citizens Bank. So they are private, not federal like Stafford Loans, for example.

At first glance, it looks like she received a good deal from Citizens considering that her highest interest rate is 4.00%.  Let’s pause though and consider that interest rates have been historically low since 2008, and we are now in a rising rate environment. That means if and when interest rates rise, so will the variable rates on Jane’s loans. And the cap on this increase is often high. In Jane’s situation, she has a couple of options.

1. Stick with her current loans.

She needs to be relatively comfortable with uncertainty and confident that interest rates aren’t going to dramatically increase. She also needs to be able to make monthly payments that are higher than she pays now when the rates increase.

2. Refinance to a fixed rate now.

Lock in a fixed rate that will be higher than these variable rates but most likely lower than Federal Direct Loan fixed rates. This will increase her monthly payment now but will save her from paying higher monthly payments if the rates rise.

3. Stay the course for now, but refinance to a fixed rate in the future.

If rates start to rise and she becomes uncomfortable with the payment amounts, she can always refinance to a fixed rate.  This fixed rate will be higher than in option 2, but she will have benefited from the lower variable rates for the time she waited.

When trying to decide which option is best for Jane (or you), I would recommend quantifying it. How much can you afford to pay each month in student loan repayment? Enter your loan information into a student loan calculator, such as this one on Bankrate, and see how a rate increase would affect your payment amounts. If there is a rate that will no longer fit into your budget, then avoid it by locking in a lower fixed rate before you get to that point. 

If I were speaking with Jane, I would advise her to go with option 2 – lock in that low fixed rate now. It eliminates the risk and avoids having to perfectly time refinancing later.  It’s important to choose a strategy that fits your needs and risk aversion though. So factor in your budget and your personal preferences but also think beyond today. In 3 years, you may take on a new financial burden, such as a home or paying for a wedding. Your job may be in jeopardy, or you may choose a position that pays less money. Consider those possibilities, and choose an option you can stick with to pay down those private student loans.


This is a hypothetical example and is for illustrative purposes only. No specific investments were used in this example. Actual results will vary. Past performance does not guarantee future results.