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Should I refinance my student loans?
What to consider before refinancing or consolidating federal student loans
Okay, you’re done with college (yeah!) — but you may have a bit more student debt than you hoped for. Don’t worry, it’s an investment in yourself and it will pay off. In the meantime, explore your options to lower your student loan interest rate and/or reduce your monthly payment. You can refinance both federal loans and private loans, it is not difficult to do, and it doesn’t cost anything to refinance. The first thing to consider is, should I refinance my student loans?
Should I refinance my student loans?
Not everyone benefits from refinancing their student loans. However, if you see lower interest rates advertised or you have more than one student loan and could benefit from consolidating, then refinancing may be a good option for you.
And, If you have good credit and a stable income, you may quality for lower rates than you did when you first took out the loan. In any case, it often pays to shop around and see what’s out there.
How to quality for a better student loan
To quality for refinancing your student loan debt, you need the following:
- A steady income
- Credit score at least in the high 600s – ideally higher
- Possibly a co-signer (if you cannot qualify on your own)
Companies that refinance student loans
Difference between private and federal loan consolidation
Private student loan consolidation allows you to consolidate both federal and private loan programs into one single monthly payment. You negotiate a fixed- or variable-interest-rate that’s lower than what you are paying for each loan individually.
Your credit score heavily influences the rate you are eligible for, or if you have a cosigner. However, when you refinance federal loans, you lose access to income-driven repayment plans, loan forgiveness programs, and other federal loan rights.
If the money you borrowed was all federal loans, you can find easier repayment options by applying for a Direct Consolidation Loan. You combine all federal student loans into one loan that has a fixed interest rate.
That rate is derived by taking the average of the interest rates on all federal loans and rounding the rate up to the nearest one-eighth of a percent. Though this method will not lower the interest you pay on federal loans, it will keep open all repayment and forgiveness options — which can be pretty important over time.
For example, repayment plans for Federal Consolidated Loans include Standard (10 years), Extended (25 years), Graduated (start low, increase every two years for between 10 and 20 years), and Income-based (10-15% of your discretionary income).
Should I consolidate my student loans?
It depends on your situation and goals. Consolidating is a good idea if you qualify for a lower rate and you’re comfortable giving up the benefits that come with federal student loans if you have them.
Making one payment every month is sure a lot easier instead of many payments — and it makes life simpler. For most of us, it’s about managing a monthly payment we can afford along with rent and the other expenses while we build our life.
If you have the credit and income requirements to qualify for a lower rate, consolidating can save you money and help you become debt-free faster.
“A negative to consolidating (federal loans) is that most people think it will lower their interest rates, which is not the case. They actually take the weighted average interest rate of all the loans you are consolidating, then round up to the nearest one-eighth of one percent. This means the aggregate interest rate will be higher. Another potential issue is that when you consolidate any unpaid interest is capitalized. This means the unpaid interest is added to the principal balance of your loan.” — Jared Andreoli, Jared Andreoli, CFP®, CSLP® Simplicity Financial
Be sure to fully understand the benefits you are giving up when you refinance federal student loans — you lose access to income-driven repayment plans, loan forgiveness programs, and other federal loan rights.
You may also lose access to Public Service Loan Forgiveness programs that offer pay-off opportunities for public servants or non-profit workers if you re-fi federal student loans.
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