According to the Project on Student Debt, 7 out of 10 students who graduated from college in 2013 had student loan debt and the average size of debt per student was $29,400. With the majority of students graduating with significant debt, debt management is an important factor in maintaining solid financial health upon graduation. If you are someone with student loan debt, you need to make sure that you are aware of all of the repayment options available to you.
One of the first steps in managing your student loan debt is understanding what you own. If most of your student loan debt consists of federal loans, then it is best for you to continue your repayment plans under the federal loan guidelines. The interest rates on these loans are likely to rise since most of them are variable loans and variable loan interest rates rise and fall depending on the overall economy.
However, federal loans, unlike private student loans, offer numerous repayment options that are based on your income and family situation. The flexibility of the repayment options is something that you would lose by switching to a personal loan.
If you are someone with a significant amount of private student loan debt, then taking out a personal loan to pay off your private student loan debt may be a good solution for you.
Personal loans are not always the best solution for replacing private student loans, as personal loans typically tend to have lower maximum borrowing allowances, shorter repayment periods and high interest payments. That being said, most private student loans are variable rate debt, which means as interest rates rise and fall so do your interest payments on the loans.
If interest rates are rising, your variable private student loan debt payments can grow beyond a level you are comfortable repaying since your payments represent a mix of interest payment and debt repayment.
If you were to take out a fixed personal loan where you had the same interest rate for the entirety of the loan, this may provide a great benefit to your budgeting and debt repayment plans. Depending on your creditworthiness, it's possible that the fixed interest rate on the personal loan may even be less than the potential variable rate of your private student loan.
Most personal loans are short term in nature with maximum repayment terms up to five years. If you think that you can pay your student loans off within this shorter time period and want to have a set payment that you can budget for during this time period, then taking out a personal loan to replace a private student loan may make sense for your overall debt management plans.
Personal loans are not always the best solution when refinancing, so before you make this decision, thoroughly weigh your options and make sure that you understand the various student loan types and repayment terms you have in place already. If you do decide to choose a personal loan, make sure you pick the lender that is best for you.