Starter’s Guide to Student Loan Refinance and Consolidation: A Primer for Borrowers

Get started with student loan refinance and consolidation basicsWhen you first start to consider embarking on student loan refinance, you’re likely inundated with promises of huge benefits and savings. It probably seems like one of those scenarios that would be great–if only you could figure out how to actually pull it off.

This guide isn’t meant to walk you through the entire process, but rather to arm you with some basic information about student loan refinancing and consolidation, so that when you jump into the process, you’ll feel comfortable and confident in knowing at least the basics.

Reasons to refinance your student loans

Not sure if refi is the right move for you?

No problem. I can convince you.

There are three main reasons why students choose to refinance their student loans:

1. Lower monthly payments

If you want to save money each month on your student loan payment, refinancing your loans can help by stretching out your loan over a longer period of time.

2. Lower interest costs

On the flip side, if you don’t mind paying a bit extra each month, you can pay less over time by condensing your loan into fewer years and saving money on the interest.

3. All of the above

Yep–that’s right. In some cases, students can both save money now with lower payments, as well as saving money over time with better terms.

It’s a win-win.

Of course, this won’t apply to all borrowers. It will depend on what interest rates you’re starting with and the makeup of your loan. But, it can be done!

Your student loan refinance options

When it comes to refinancing your student loans you have a few different options, which will depend on your loan circumstances:

1. Federal loan consolidation

One of the easiest things you can do is to consolidate your federal student loans into a single loan. You can do this from the U.S. Dept of Ed site and it’s usually not a difficult process.

However, this won’t lower your interest rate.

Your interest rate will be a weighted average of your existing loans, so the only real benefit from this step is to condense all of your loans down into one payment. You may be able to reduce the amount of your monthly student loan payment by qualifying for a longer repayment term.

2. Income-based repayment

Your federal loans will likely qualify to be moved onto an income-based repayment plan.

In this case, you’ll pay a set percentage of your discretionary income each month rather than paying a fixed monthly payment. This option can be helpful if you’ve taken an entry-level position and aren’t making enough to cover your student loan payments.

However, there’s a downside.

Once you opt for income-based repayment, you are locked in. There’s no switching back. You’ll pay that set percentage of your income (even if your salary increases) until you’ve paid off your loans entirely, or until they expire after 20 or 25 years.

So, if you choose this option you may end up paying your student loans well into your 40’s.

3. Private student loan refinance

With a private student loan provider, it is possible to find the best scenario: lower student loan payments, lower interest, shorter repayment term.

As I mentioned above, this won’t happen to everyone. It will depend on the types of loans you have and the interest rate you’re currently paying. But, it’s usually worth exploring. Even if you don’t qualify, the process is usually pretty simple and most lenders will run a “soft” credit check, meaning it won’t hurt your credit score.

More on student loan financing

You don’t need to be an expert in student loans to go through the refinancing process. You do however need to have a base level of understanding to be able to evaluate your options and make the best choice.

Eligible loans

If you have a combination of private and federal loans, it can be a bit tricky to figure out which loans are eligible for which options.

Only federal loans will qualify for federal consolidation and income-based repayment plans. But, private lenders will often allow you to consolidate both federal and existing private loans into a single payment.

Interest rates

Public enemy number one for student loan borrowers is usually interest. We all know that higher rates are bad, but what’s a good rate?

Rates will vary, but you can look to mortgage rates to get an idea of what market rates may be at this time. (Student loan rates are routinely 2-3 percent higher than mortgage rates because it is unsecured debt).

Keep in mind that your personal rate will be determined by your credit history and factors taken into account by different lenders.

Fixed vs. Variable rates

How much do you like to gamble?

Having a variable interest rate on your student loans means that it will go up and down–usually in conjunction with global rates. It could adjust as often as once a month, which means that although you may have a good deal upfront, it could end up costing you more if rates rise throughout the life of your loan.

Fixed-rate means just what it says: fixed. If you finance your loans at 5%, you pay 5% until the end or until you refinance.

Most borrowers opt for fixed-rate loans for the sake of consistency, but variable rates can save you money if rates work out in your favor.

*As of right now (January 22, 2016), it’s probably best to avoid variable rate loans, as rates are near historic lows, meaning they are most likely to rise in the future.

Repayment schedules

By default, most student loans will be financed over 10 years.

When refinancing, you’ll usually have the option to choose a term–sometimes from anywhere between 3 to 25 years. While a longer-term will lower what you pay each month, it will mean making more payments and paying more in interest.

You should evaluate repayment options to find the shortest possible term that gives you a payment that fits your budget. This may mean paying off your loans quickly, or it may mean a slightly longer term. Just keep in mind the trade-offs involved.

Autopayments

Many lenders offer interest discounts for borrowers who set up autopay. If at all possible, you should take advantage of this. It’s like getting free money.

Co-signers

You can sometimes use a co-signer on your student loans in order to qualify for better rates and terms. Some lenders may require you to have one in order to qualify for refinancing, but this isn’t always the case.

Get started with private refinancing

Ready to jump in?

The only thing you need to get started is a ballpark idea of the total amount you’re looking to refinance.

Then, get pre-qualified offers from multiple lenders using Credible. It takes about 2 minutes and they’ll run a “soft” credit check that won’t show up on your credit report.

The great thing about using Credible is that you won’t be locked in–but it will give you some options to evaluate.

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