If you graduated from college sometime in the last decade, then chances are that you’re seriously burdened by student loan debt. Among all millennials, regardless of educational background, 42 percent have some student debt. For those who went to college, that shakes out to 66 percent of public university graduates and 75 percent among those who graduated from a private institution. All told, that comes out to over $1 trillion in student loan debt in the United States.

For former students like you, paying down this debt is no easy task. In recent years, pay increases have failed to keep up with inflation for most workers. This problem is compounded for those who have student loans with high interest rates — and the interest rates for student loans are generally much higher than those for other common forms of credit.

Enter Student Loan Refinancing

The most promising option for people looking to ease the burden of student loans is to refinance — or consolidate — their debt. Refinancing works like this:

  • The borrower enlists a third party, usually a lending agency, in order to help them pay off their current student loan debt.
  • The third party has cash on hand to pay the borrower’s debt and arranges a new loan with the borrower in exchange for this service.
  • The borrower agrees to terms with the third party that include a lower interest rate for their new debt.

In short, refinancing allows student loan borrowers to pay off their debt at a potentially lower interest rate, saving them money over the course of their loan repayment. On the face of it the process is simple, but there are many subtleties to student loan refinancing that can turn some student loan borrowers off from the process, keeping them from the savings that it entails.

It All Comes Down to Interest Rates

Interest rates are the nexus of most decisions made by student loan borrowers. A high interest rate means that you will end up paying more in the long run, while a low interest rate equals great savings. The key motivation behind refinancing is to secure the lowest possible interest rate, and thus the best deal, but how can this be done?

Many factors go into determining the interest rates for student loans. For federal loans, your interest rate depends entirely on the type of loan that you took out and the time that you got it. The government sets new interest rates every year, depending on the economic climate of the time. You can see in this chart that interest rates were generally quite high from 2006 to 2010, then they began to lower. For the 2017-18 school year they are expected to begin rising again.

If you have taken out a private loan to pay for college, your interest rate will have been determined by your specific lender, through a more sophisticated process that takes into account your individual financial situation as well as the economic conditions of the time. The same will be true when you refinance. Here are some tips to help you secure the best interest rate:

  • A Good Credit Score. When it comes to any sort of loan, having good credit will make the lender feel more confident about you. Lenders want to work with borrowers who are likely to pay their loans back in good time, so lenders are more likely to offer enticements such as low interest rates to borrowers with great credit history.
  • A Reliable Co-Signer. Similar to above, lenders also like it when your co-signer has good credit. A co-signer who always pays their debt in a timely fashion will make lenders more confident about working with you if you don’t have excellent credit history just yet.
  • Sign Up For AutoPay. If you haven’t used AutoPay before, it’s a system wherein your monthly loan payments are automatically taken out of your bank account. This can be very useful if you sometimes forget to pay bills, but it can also lower your interest rates. Lenders want to receive payments on time, so many lenders will take 0.25 percent off of your interest rate for signing up for AutoPay.
  • Refinance at the Right Time. As with federal student loans, the interest rates for private loans are tied to the state of the economy. During times of economic recession, interest rates will often decrease in an effort to promote spending. This can be especially important if you’re thinking about a variable rate loan, which we’ll talk about next.

Variable vs Fixed Rate Refinancing

One of the most important dilemmas that you will face in refinancing is whether to use a variable or a fixed rate loan. If you have taken out a federal student loan, then you’re already familiar with fixed rate loans. In a fixed rate loan your interest rate is locked in at a particular percentage, which was decided when you borrowed the money, and it stays there unless you refinance for a lower rate.

The interest rate in a variable rate loan can change over the term of your repayment, usually tracking economic conditions over time. Variable rate loans often start at a lower rate than their fixed counterparts, but that rate can go up later on. This makes variable rate loans a good choice if you plan on paying off your debt very quickly, before the interest rate can get very high. A student loan refinancing calculator can help you decide exactly which kind of loan is best for your situation.

Student loans can be a serious burden. However, if you refinance your student loans at a good interest rate, you can save money in the long term and make repaying your debt much easier.