According to The Federal Reserve, approximately 44 million Americans hold a total of $1.45 trillion in student loan debt in 2017. That means the average student loan borrower owes around $32,000. That is a staggering number for any person who is starting out in life. Student debt is a huge burden that can last for decades and impede one’s ability to achieve life goals. If you have student loan debt, you some options available to you that can help you pay off these loans sooner than later. In this ultimate guide to student loans, we’ll cover everything you need to know about refinancing, consolidation, payoff, and forgiveness.
Student loans are a big source of funds to pay for the cost of attending college. There are two types of student loans commonly referred to Federal student loans (such as the Direct Loan) or private student loans (from banks, credit unions, and other financing companies). It is important to know the differences because each student loan type can determine the best option for you. Federal Student Loans are loans funded by the federal government to help pay for your education. A Federal student loan is borrowed money you must repay with interest. Generally, Federal student loan payments are not required until after graduation or separation from the school. Private Student Loans are nonfederal loans made by a lender such as a bank, credit union, state agency, or a school. Payments are generally not required until you graduate or leave school. They do not have the same federal protections or benefits but interest rates may be a bit more competitive.
After graduating from college or drop below half-time enrollment status, you will have a six-month grace period before being required to repay your federal student loans. During this grace period, you’ll be notified of repayment information and your first payment date from your loan servicer. Payment to your Federal student loans is due monthly. If you go back to school or increase your credit load to meet half-time enrollment status, you can temporarily postpone payments. Similar to Federal student loans, private student loan repayments may begin after graduation or after a grace period. Find out from your private student loan provider if a grace period applies. With Federal student loans, you’re offered repayment options such as income-based repayment, graduated plans, and extended plans that can make monthly payments affordable. You’re also able to easily change your repayment plan by simply calling your lender or servicer or logging into StudentLoans.gov. On the other hand, with private student loans, you’re not given repayment flexibility. You’ll be required to get a new loan. Basically, refinancing your existing loan into a new one for a lower rate or longer terms.
Although most people use refinancing and consolidation interchangeable, there is a difference. Know the difference because choosing one option may cause you to lose some federal repayment benefits. A student loan consolidation is a process of combining one or more federal student loans into a single new federal consolidation loan. Consolidation can simplify the repayments by combining multiple payments into one. With a federal student loan consolidation, the average interest rate of all loans consolidate becomes your new interest rate. You cannot consolidate private student loans into a federal student loan consolidation program. Don’t confuse Federal student loan consolidation with student loan refinancing options through a private lender. A private lender can “consolidate” both private and federal loans by refinancing into a new loan. The new loan will have new terms, interest rates, and conditions. Unlike the consolidation of federal loans into the federal consolidation program, private lender refinancing requires credit approval.
Typically, if you have Federal student loans you want to consolidate and with private student loans, you may want to refinance. It may get confusing because with private student loans you can refinance both your Federal and private student loans together. You necessarily may not want to do that, but you can depend on your situation. The best option is to have a payoff strategy when it comes to student loans and using consolidation or refinancing or both to help you pay less interest and eliminate the debt faster.
Student loan refinancing is when you apply for a new loan and pay off existing loans. Once approved by a lender, they’ll pay off your old loans and you’ll now have a one new student loan payment. There are two scenarios in which you may consider refinancing:
- For instance, you may have graduated with one student loan and seeking to save by refinancing into a lower rate loan. You want to have lower payments or shorter term.
- Or you graduated with multiple student loans and seeking to save on interest payments and make one payment as opposed to multiple payments.
Most look at refinancing student loans because it lowers the cost of the loan by lowering the interest rate and shortening the term. These are the two things you should look for when assessing your student loan refinancing options:
- The interest rate
- Length of the loan term
If you have both federal and private student loans you cannot consolidate the different loan types together under the federal consolidation program. However, you can refinance federal or private student loans separately or together through a private lender. Just remember when you refinance federal student loans into a private student loan, you lose federal repayment benefit options. If sometime in the future, you cannot make the new private student loan payments, you’ll need to refinance and qualify to get a lower payment. Think of this as having an existing car loan and wanting a lower payment and refinancing with another lender. Things to consider:
- How much Federal and private student loans do I have?
- Is it beneficial to consolidate your Federal loans and separately refinance private loans?
- Will refinancing your federal and private loans together save you money?
- Can you afford new private loan payments?
- Does your existing private student loan have any prepayment penalties?
- What additional benefits offered by the lender?
This typically happens when you refinance today at one rate and next year the rate drops substantially and you want to take advantage of that. Every time you seek refinancing, you’ll need to meet the lenders approval guidelines. Just keep in mind by continuously refinancing your student loans, you’re actually not paying them off but extending their hold on you. Refinancing should be a tactic to help you pay off student loan debt sooner and at far less of a cost to you.
There is no perfect time to refinance because many variables are at play. Student loan refinancing is a tactic to help you pay off the debt. It’s best used when part of an overall student loan payoff strategy. For one, don’t wait until you can no longer afford to make the payments. Waiting until you’re financially tight, may lead to loan application denial. If you’re drowning in other types of debt, most likely your credit score has taken a substantial hit or you may not have the necessary debt-to-income ratio for approval. Many lenders offer student loan refinancing for recent college graduates. They take into consideration the probability your income will grow as you enter the workforce and begin your career. Look into refinancing when you have graduated from college or have made a strong commitment to repaying your student loans off sooner.
You have options so don’t despair. Many student loan refinancing lenders actually allow you to check your rate without affecting your credit score. Here are a few things to look for:
- Check rate without affecting your credit score
- No application fee
- No origination fee
- No prepayment penalty
- Additional benefits or repayment features
Ideally, you want to have these student loans refinanced under your name only. Sometimes you need a cosigner. Make sure you and the cosigner understand the legal commitment you’re undertaking when they cosign a loan for you. Additionally, research to see if the student loan lender offers a cosigner release. Some lenders offer a cosigner release form that removes the financial obligation of the cosigner after the principal borrower has made on-time payments for a period of months.
Student loan refinancing can save you thousands of dollars with a lower rate and better terms. Refinancing isn’t for everyone but most people can see financial benefits from doing so. Make sure you weigh the pros and cons of refinancing your Federal student loans and private loans together. Or you may consider just consolidating your Private student loans and keeping your Federal loans separate. Determine what tactic is right for you. When considering refinancing your student loans, make sure you do your homework and choose the right lender that share your values. You have options and the more you know the better decision you’ll make.