This guide is intended to provide you with the necessary information to be able to make an informed decision around how to select the best route for refinancing or consolidating your student loans. This guide is broken down into five parts addressing key points in handling student debt.
Step 1: Consolidation vs. Refinancing: Is there a difference?
Consolidation refers to taking a new loan to pay off multiple student loans, folding all your student debt into one monthly payment.
Refinancing refers to taking out a new loan with a new interest rate and loan term.
Refinance Student Debt with a Federal Direct Consolidation Loan
You can combine your Federal student loans into one Direct Consolidation Loan offered by the Federal Student Aid Office of the U.S. Department of Education. The interest rate of the new loan is based on pro-rated average rates from your old loans.Pros:
- Those with certain Federal loans can easily qualify
- You make one monthly payment instead of several, simplifying your finances
- You may qualify for Public Service Loan Forgiveness and Income Driven Repayment Plans
- You can consolidate only Federal student loans with Direct Consolidation Loans
- As interest rates for the new loan take an average of your previous rates, your overall interest paid out on the loan remains the same
- The Income Driven plans result in overpayment for some borrowers
Consolidate both Federal and Private Student Loans with a New Private Loan
With this option, you take a new loan with a private lender, refinancing all your student debt, whether Federal, private or both, into one loan. Look to qualify for a lower interest rate, lower monthly payment, or both.Pros:
- In the current competitive marketplace for student debt refinancing, you can likely lower your interest rate
- Some borrowers can lower their monthly payment
- Refinance both Federal and private loans for all types of degrees
- You lose the benefits of Federal loan programs such as Income Driven Repayment Plans and Public Service Loan Forgiveness
- You must meet the lender's requirements for credit worthiness to qualify
Why Private Student Loan Consolidation?
The right private consolidation loan can lower the total interest paid over the life of your loan, and get you organized to retire your student debt faster. We'll look through the process of choosing a private student debt consolidation loan point-by-point to help you get the right loan that works for you.
Step 2: Consider Refinancing Your Student Loans for These Six Reasons
We've covered the difference between Federal and private student loan consolidation/refinancing, now let's look at the benefits of consolidating student loans with a private lender.
Refinancing student loans is one of the key financial moves you can make in life. The right loan can lower your monthly payment, save you thousands of dollars in interest over the life of the loan and shorten your payback period by years.
Reduce total interest paid
First and foremost, in refinancing student debt, the top goal is to reduce your interest rate. Lenders are offering variable rate loans with rates starting at 2.0% APR, and fixed rate loans beginning at around 3.5% APR.
The bottom line, the overall cost of your loan is less with a lower interest rate.
Reduced monthly payments
Your monthly student debt payout can eat up a huge chunk of your income, especially with multiple student loans. Refinancing student debt to one private loan can reduce your monthly payment.
Either a lower interest rate or a longer loan term will reduce your monthly payment. Bear in mind that increasing the term of your loan means more paid in overall interest.
Make only one student debt payment each month
It can be difficult to keep up multiple student loan payments each month, as you must budget for each payment and make it by the right date. Consolidating all your student debt into one loan saves time and trouble, and simplifies your financial planning.
Retire a Cosigner
Is there a cosigner on any of your student loans? Or are you yourself the cosigner on a student loan? With a new consolidation loan, the old loans are paid off and the cosigner is no longer responsible for payments should the student borrower default.
Improved Customer Service
As you shop for a private student debt consolidation loan, check the customer service record and policies of each potential lender. You can often find a company with better service than your current loan servicer.
Transfer Parent PLUS Loans to student's name
Some private student loan lenders are able to help parents with Parent PLUS loans transfer the new loan to the child's name.
Step 3: Choose Which Loans to Refinance
Certainly, you have the option to refinance all your student debt into one loan, but it's best to consider each loan on its own merits. Here's a primer on the best loans to refinance, and which to keep.
Best Loans for Consolidation/Refinancing
Private student loans are generally the best for refinancing, primarily as they tend to have higher interest rates than Federal student loans. You stand a good chance of getting a better rate for your private student loans.
If you currently have a private variable rate student loan, take a close look at what fixed interest rate you can qualify for as rates may well rise looking ahead.
As competition heats up in the private student loan marketplace, more lenders offer flexible repayment options. A new consolidation loan may bring improved repayment options compared to your current private loans.
Federal Parent PLUS and Graduate Loans
For the 2014-15 school year, the interest rates for Federal Parent PLUS and Graduate loans is a stiff 7.21%. These loans over time tend to offer higher rates, making them ripe for refinancing.
Parents and those with graduate degrees are likely to have sufficient credit histories to qualify for private consolidation loans at lower rates than this.
Additional Types of Federal Loans
Interest rates tend to be high also with Unsubsidized Direct Federal loans, with a rate of 6.8% APR on these loans from 2006 to 2013.
With a decent credit record, borrowers should be able to qualify for a private consolidation loan at interest rates that will save them money over the above types of loans.
Student Loans to Avoid Refinancing
Any loan with a great interest rate. A range of Federal student loans have low interest rates, for example, subsidized student loans featuring rates as low as 3.4% APR. Leave them be!
Many Federal loans also offer benefits such as forbearance or deferment that are far less common with private lenders.
Federal loans that qualify for forgiveness. Some Federal loans qualify for programs like teacher student loan forgiveness, Pay as You Earn or Public Service Loan Forgiveness. You lose these Federal benefits if you refinance.
Step 4: Find Out if You Qualify to Refinance Student Loans?
As with any type of private loan, you must meet lender requirements to qualify for a student debt consolidation loan. The lender will review your financial standing and credit history in deciding whether to finance your loan.
A number of factors come under consideration in the approval process:
Lenders look for a record of steady employment and an income of at least $2,000 per month.
What percentage of your income already goes to service debt? Requirements vary from lender to lender, but most look for a debt-to-income ratio of less than 45%.
Again, the minimum allowable score varies by lender, but generally, you need a score of 680 or better. With a lower score, you'll need a cosigner to qualify.
Requirements do vary, for example, some lenders have a lower credit score requirement, but expect to pay a higher interest rate in this case.
It's a good idea to do some rate shopping, applying to several lenders to see who gives you the best interest rate and terms. Keep your applications within a 30-day window to avoid a negative impact on your credit score.
In case you are rejected for a loan, you may request an explanation from the lender. They must send you a notice of Adverse Action, as per lending law. Once you know why you were not approved, you can take steps to remedy the situation and re-apply.
Step 5: Compare Lenders for the Best Student Loan Refinancing Deal
The key to a successful student debt consolidation loan is finding the best deal for your situation. Here's what to look for.
Shop the Best Interest Rates
Rates will vary with the type of loan, fixed or variable interest rate. The term of the loan affects rates too, with shorter terms getting you better rates. Your credit history also affects the rates you are offered.
You get a better rate with variable rate loans as a rule, but the rate can rise unexpectedly, adding to the total cost of your loan. A fixed rate loan offers the advantage of a predictable rate and monthly payment over the life of the loan.
A variable rate loan can work for you if you intend to pay off your loan over a shorter term, say 5 years or less. If you prefer a longer loan term, up to 15 – 20 years, you may sleep better locking in a fixed rate that you can rely on.
If you look at variable rate loans, check to see if the lender offers a maximum variable rate interest cap. Such a rate cap might be in the 8 – 9% range, offering some protection against dramatic rate hikes.
Term of Loan
Typically, lenders offer loan terms of 5 – 20 years. The shorter the term, the less interest you pay and obviously you'll be clear of debt sooner, but your monthly payment will be higher than it would be if you went with a longer term.
Longer terms in the 15 to 20 year range lower your payments and free up your cash flow, but then you pay a higher amount of interest over the term of the loan, making the loan overall more expensive.
Look for Additional Benefits
Your goal with refinancing student debt is to save money, but there are additional benefits to be gained.
Some of our recommended lenders, notably SoFi, offer unemployment protection should you become unemployed. They help you search for new work, and you can ask for up to 12 months of deferred payments, in 3-month increments.
Additionally, some of our lenders allow you to dismiss your cosigner after a set number of on-time payments.
These are some of the leading benefits offered by our featured lenders. We recommend you get acquainted with our Student Loan Consolidation Reviews as part of your research on dealing with student debt. These top lenders offer some of the best interest rates and loan benefits in the increasingly competitive student loan refinance business.
You've successfully navigated MoneySavingPro's Ultimate Guide To Refinancing Your Student Debt. Now you are a step ahead of the game in better understanding all of your options to address your student loan debt and realize the savings that are accessible in today's lending environment. Good luck!