This is a great guest post by Nicolas Chee on student loan refinancing and consolidation. Nicolas Chee is contributing editor at StudentLoans.net, which covers all things news related to student loans. While I don’t have student loans myself, Nicolas is no stranger to them. Hopefully these 6 awesome tips will help you understand which option is right for you. – Fairly Frugal Fella
As a college student, you probably have not had a lot of experience with your student loans outside of you know that you have them and the money you borrowed has helped to pay for you to get an education. There is one little thing that you may not know so much about, but it will impact you greatly in the end – student loan repayment. Everyone who borrows money to go to school will be required to pay it back. In fact, there is more than $1.4 trillion in student loan debt across the board and the average student is said to graduate with a four-year degree and over $30,000 in debt.
Whether you are new to student loan debt repayment or not, there are some ways for you to limit how much you spend on interest and other fees. In fact, student loan refinancing and consolidation can help reduce the amount of money you pay out over the term of your loan. Below, we will look at everything you should know about refinancing and consolidating your student loans.
1. Federal Student Loan Refinancing Does NOT Exist
If you are thinking about refinancing your student loans, know that there is no federal refinancing program. Yes, you can refinance your federal student loans, but you must do so through a private lender. So, what does this mean for you? It means that you will not receive the federal loan benefits you once had. Therefore, you will no longer be able to apply for forbearance, deferment, or any of the available payment plans that the federal option presented to you.
2. Refinancing Will Change the Terms of the Loan
When you refinance your student loans, your repayment terms do not stay the same. What this means for you is that you will need to abide by the new terms. Fortunately, you can usually choose what terms you want from a few different options that are presented to you.
If you are approved for refinancing, you may receive a lower interest rate if you are creditworthy, which in turn will lower your monthly payment, except maybe if you choose to shorten the repayment term of your loan.
3. Federal Consolidation is NOT the Same as Private Refinancing
Many people use the terms refinancing and consolidation interchangeably, but they are not the same. In fact, there is a pretty big difference between them. Both options do replace your student loans with a new loan and terms to follow, but the main difference is that a consolidation of your student loans will NOT lower the interest rate. The best that consolidation will do is average out the interest rate across all your loans. For instance, if you have three loans and each one has an interest rate of 7.5%, 6.8%, and 8.1%, your total interest rate on the new loan would be 7.47%.
4. Student Loan Refinancing is Not as Easy as it Sounds
Many borrowers think that it will be easy to refinance their loans, so they head into a private lender ready to do so, only to find out that they do not qualify. This is something you need to sit down and consider BEFORE you head to your local banking institution. There are some strict criteria that need to be met before you will be approved to refinance your student loans. Some of that criteria includes a good credit score, solid credit history, good income, and a solid employment history. If you are still in college or you recently graduated, you are unlikely going to meet this criterion and you will need a co-signer to sign off on the refinancing.
5. Consider Other Ways to Reduce Your Interest Rate
There are other alternatives to lowering your interest rate and you do not have to refinance your student loan. In fact, if you do not qualify to refinance your student loan debt, then you may have no other choice than to try these other options. One option that works best for students is to pay their interest while they are still in school. This way, the interest does not just add up and get tacked onto your student loan once it comes time to pay it.
6. Pay Down Debt BEFORE Applying to Refinance
BEFORE you apply for refinancing, pay down some of the outstanding debt that you may have. Lenders tend to look at any debt obligations that you already have outstanding and they will reduce these debts from your total income, which could mean that you receive a denial.
Student loan refinancing can help to lower your interest rate and allow you to pay less money over the course of your loan, but it can be hard to receive approval. If refinancing is not an option on the table, consider consolidation.