How to Consolidate and Refinance Student Loans
After the loan forgiveness, refinancing was the most popular topic you all asked about this week. You want to know when is a good idea, what the difficulties are, and which companies you can trust.
This question from Gabi describes some common problems well:
Why is it so difficult to refinance a loan after graduation? Even though I have around 800 credit points, a low income-to-debt ratio (loans less than my annual salary), an engineering degree, and 2 years of college, it was nearly impossible to refinance without a job seeker. Several companies that let me place my bet gave me 6.25%. Don’t companies trust recent graduates to pay off loans? Who gets the 3% interest rates that all those refinancing companies advertise? Is this just part of a conspiracy to get a student loan from an applicant?
There is something to unpack, so let’s get started.
Refinancing vs. Consolidation
If you are not eligible for student loan forgiveness, one strategy that can help you with payments is refinancing. But before you do that, there are many factors to consider.
First, there is a difference between consolidation and refinancing, although they often go hand in hand. Consolidation is when you combine multiple loans into one loan, usually to make it easier to keep track of and pay off. When refinancing, you can do several things: replace your existing student loan with a new loan at a different interest rate; asking for lower monthly payments (which would mean paying more interest over time); or increase monthly payments to shorten the loan term (and save on interest).
Refinancing can make sense for private loans, and in fact, every expert I spoke with said emphatically that you should not try to refinance government loans from a private lender or bank, even if they offer a lower rate. “Refinancing can be devastating if you follow the path of forgiving a loan,” says Travis Hornsby, founder of Student Loan Planner . “Under current laws, consolidation for federal loans is only useful when you just graduated or if you are using an old program and do not have access to Pay-As-You-Earn.” You don’t want to lose credit over the years of repayments you made for forgiveness.
“You lose most of your rights,” says Persis Yu, a lawyer at the National Consumer Rights Protection Center. For example, with federal loans, you can qualify for income- based repayment and forgiveness plans , and they will be paid back if you lose forever or die before you pay off your entire debt. None of this applies to private loans.
Shop around
As with any financial product, you’ll want to take a closer look and really make sure you understand your options. Take this question from John:
I am 30 years old and still have a loan of $ 70,000, of which about $ 40,000 is in private loans. I wish I knew more than 10-12 years ago when I took out loans.
In such a situation, is it an overwhelming advantage over consolidating private loans through a group like SoFi?
There seem to be many options for consolidating federal loans, but not many options for consolidating private loans. Any understanding of how to handle private loan consolidation would be helpful!
In fact, the opposite is true. As far as consolidation is concerned, there is only one option for federal loans and that is the federal direct consolidation loan . “Federal consolidation does not reduce costs because the interest rate is the weighted average interest rate rounded to the nearest 1/8 percent,” says Mark Kantrowitz, student loan expert. “This allows you to choose a longer maturity, which will lower the monthly payment but increase the total interest paid over the life of the loan.”
If you need help consolidating loans, the Department of Education has a dedicated help line that you can reach at 1-800-557-7392. ( You will find more information here .)
On the other hand, there are many options for consolidating and refinancing private loans. Horsnby says John is probably only familiar with SoFi because of their aggressive marketing. But sites like Student Loan Planner and many others allow you to compare rates. And this is not a one-off situation. You can refinance more than once, and you should if you can get a better deal.
It’s another matter whether they want to work with you or not. As Gabi noted, this does not mean that you can go to the bank and come out with better loan conditions, regardless of your financial situation. According to Yu.
If you are aiming for a lower interest rate on a private consolidated loan, the lender will base it on your salary and credit rating (and the applicant’s credit rating, if you have one), and you will obviously be better off. if your credit rating has improved after you took out the original loan, or you have opted for a shorter maturity. Again, choosing a shorter maturity will increase your monthly payment, but you will pay less interest in the long run.
If you are allowed to refinance private loans with another private company, make sure that you are offered fixed (and not variable) interest rates, find out what the refinancing fees are, and see what kind of tolerance policies the company has. if there’s. “This is probably one of our biggest challenges,” says Yu, who is the director of NCLC’s student loan and borrower assistance project. “Lenders are not prepared to do much for their clients if they face financial problems.”
At the end of the day, you need to think about what your goal is. If it’s necessary to lower your monthly payments, know that you’ll pay more in the long run, but it might be worth it if it means you won’t miss out on a payment now. If your goal is to pay off your loan faster, know that you will now be paying more. But if you can rock it, it’s worth it.