If you’re considering refinancing your student loans, the most important thing is to understand the difference between refinancing and consolidation and what impact each can have on your future finances.
Do note that while refinancing is possible for both federal and private loans, consolidation is only possible for federal student loans. If you have both types of loans, you can have them refinanced together from a private lender.
As the term suggests, consolidation means bringing all of your (federal) loans together into a single loan with a new rate of interest (which will be the weighted average of all your individual loan rates) and a new repayment term. Most people exercise this option in a bid to reduce their monthly payments and to have the convenience of managing a single monthly payment. However, consolidation may have a flip side: while you may spread your monthly payments thin over a longer repayment term, you may end up paying significantly more interest over the years. Additionally, you may lose some of the key benefits associated with your original federal loan.
Refinancing, on the other hand, means that a private lending bank or company will take over your loan, pay it off, and give you a new student loan at a lower rate (depending on your credit score, present income, etc.). Refinancing is useful when you want to bring down your interest rate and pay off your loan sooner. Students can save thousands of dollars by making the right refinancing choices at the right time. Again, when you refinance a federal loan, some of the benefits of federal loans—such as income-based repayment and loan forgiveness—may no longer apply.
Both refinancing and consolidation come with certain eligibility criteria, such as the type of loan, the school you went to, any default history, and your credit score. Being employed increases your chances of securing a refinance, as does having a cosigner (e.g., parent, relative, friend, or colleague) with an excellent credit score.
If it’s refinancing that you’re looking for, it will pay to shortlist more than one refinancing lender and compare the terms and benefits offered by each before you sign on the dotted line. Use an online private loans for students aggregator that brings together the best, vetted lenders under one platform for you to compare and choose. Use their online calculator to understand how much you’ll end up saving with each lender.
Which loans to refinance?
Experts say that it’s better to group and refinance some of your loans and leave out a few. Here’s how to decide:
- Pick the loans with the highest interest rates. These would typically be the loans you’ve taken from private lenders. However, federal PLUS loans and federal graduate loan rates too have high interest rates.
- Pick the loans with variable interest rates and refinance them at a low fixed interest rate if possible.
- Leave out federal loans that have very low interest rates. It’s not worth going through the hassle of refinancing if it won’t save you a substantial sum.
- Don’t have a federal loan refinanced if you don’t want to forego benefits such as loan forgiveness and pay-as-you-earn.
Here are some questions to ask yourself as well as the lender before making a decision:
- What would be better for you: refinancing or consolidation?
- Can you apply for refinancing or consolidation while still in school?
- What are the rates being offered by the lenders you’ve shortlisted?
- Do you have the option to choose between fixed and variable interest rates?
- Will refinancing or consolidation lower your interest rate? By how much?
- Will it lower your monthly payment? By how much?
- Will your chosen lender refinance both your federal and private loans as a single loan?
- What if you default on your payments? Will the lender offer any help (unemployment protection, for example)?
- Will the lender bill an origination or processing fee?
- Is there a prepayment penalty associated with the refinancing program?
- Can you choose a shorter repayment term by increasing your monthly payments, and vice versa?
- Does the lender offer customer service dedicated to refinancing clients?
Lastly, if your aim is to save a significant amount of money over the life of your loan, your best bet would be to go with a private lender that offers the lowest interest rate. But if your main concern is to that you may default on your loan repayment in the near future—for whatever reasons—you might want to explore what repayment protection a lender offers and go with that.