If you’re like most students thinking about student loan refinance, then you’re probably feeling a whole lot of anxiety.
You know that you could save money by refinancing (maybe?) but trying to unravel the process is like untangling your headphones after you’ve carried them around in your backpack all day. Consolidation? Refinance? Income-based repayment? What’s the right option? Where do you start?
That’s why we’ve created this quick guide. It’s not a comprehensive manual to all things refinance, but it will give you a good place to start. The goal is to help you make some progress, and relieve a bit of the pressure that’s been building up. Plus, you’ll probably save some money by just taking a few steps.
Here’s where to start refinancing your student loans:
1. Consolidate your federal loans
The first step in this process should be to consolidate your federal student loans. This may not save you a ton of money, because the interest rate that you receive will be a weighted average of the interest rate on your existing loans.
However, it will make things a bit easier to manage–with just one single loan for all of your direct federal student loans, you’ll only receive one bill, and only have one payment.
This will change the terms of your federal loans. You might reduce your monthly payment, but it could also increase the amount of interest you pay over time. Make sure you understand the terms before choosing this option.
2. Consider income-based repayment for your federal loans
Direct federal loans can qualify for an income-based repayment plan.
Under this type of arrangement, your monthly payment will be capped at a certain percentage of your monthly income (usually 20%). This can be useful if–for instance–you have taken a low-paying, or entry-level position now, and can’t afford your normal student loan payments.
Do consider the long-term implications of choosing this repayment option. Once you choose income-based repayment, you will not be able to reverse this decision later.
If you make a much higher salary in 10 years, you will be paying the same percentage to your student loans until they are paid off.
Note: You may want to skip this option if you’re planning to take step 4 (below) where you’ll consolidate all of your student loans intro one single payment.
3. Refinance private loans
The next thing to do is consider your private student loans.
If you have a number of private loans from various lenders, you’ll likely want to consolidate these by taking out a single new loan to pay off all of the others.
Private loan refinancing can be more tricky than federal loans. You usually need to go through a traditional credit check, and may need a cosigner to qualify. However, this could save you a lot on your monthly payments, in addition to securing you more favorable terms.
Note: If you’re planning to take step 4, you may consider skipping this step and save yourself the hassle of going through two private refinance processes.
4. Consolidate both federal and private
Depending on how much you owe and your credit history, you may be able to qualify for a single private loan that will consolidate all of your remaining debt.
For this, you’ll want to explore online lenders as well as banks or credit unions as sources for refinancing.
You may be able to save considerably on interest by consolidating all of your loans into a single payment. This could also lead to a combined payment that is considerably less than the sum of your separate student loan payments.
It’s important to note that this option is not for everyone. It depends heavily on available terms and interest rates. Be sure to research your options when considering complete student loan consolidation.
5. Refinance as necessary
So, you’re done, right? Well, maybe. Make sure you are periodically rate shopping. It might be possible to refinance again, whether all your loans are consolidated into one or not.
Over time, the market rates for private loans will change, as will your credit score. Either of these could lead to landing a better deal on your loans. Keep an eye on rates and consider when it makes sense to refinance.