Congratulations — you’re officially a college graduate! After years of late-night studying, loads of homework, tests, and papers, you’ve earned your college degree. And, if you’re like most college graduates, in addition to getting a diploma, you’ve also accumulated some serious student loan debt. Refinancing or consolidating your student loans may help you lower that debt. Here’s how it works.
What is consolidation?
With the rising cost of education, most students have to take out several student loans to pay for college or grad school. Consolidation allows you to combine all of your loans into one.
Federal student loan consolidation
Federal student loans can be consolidated under the program. The new interest rate will be an average of the combined loans, so consolidating will not lower your overall interest rate. The major benefit of a federal consolidation is the convenience. You’ll have fewer payments to keep track of and fewer lenders to deal with. You can also choose to ask for more time to repay the loan. This will lower your monthly payment, but it will also increase the amount of total interest you pay. The downside of consolidation is that you may lose the borrower benefits of the original loans, which may include interest rate discounts, principal rebates, and loan cancellation benefits.
Direct Consolidation Loan requirements:
- You have graduated, left school, or dropped below half-time enrollment.
- You have at least one Direct Loan or FFEL Program loan that is in a grace period or in repayment.
- You cannot be in default (or must repair the default) on any outstanding federal student loans.
Private student loan consolidation
Private student loans can also be consolidated into one loan. When you consolidate student loans with a private lender you are actually refinancing all the loans into one. The means, unlike a federal student loan consolidation, the interest rate will be based on a totally new loan and not an average of the loans being rolled together. So, in addition to the convenience of a single monthly payment, private lenders may be willing to renegotiate the interest rate, which may save you money.
What is refinancing?
If you have a good income, high credit score, and a track record of making on-time payments, it may make sense to refinance. Unlike consolidation, with refinancing you take out a brand new loan and use it to pay off one or more of your federal or private student loans through a private lender. In addition to the convenience of having just one payment, with refinancing, the lender may be willing to renegotiate the original terms of the loans. When you first took out your loans, you were a student and probably had little to no income. If you now have a good-paying job and a high credit score, the lender may be willing to lower your interest rate, which will save you money. The lender may also be willing to change other terms such as removing the co-signer (most likely your parents) from their obligation to the loan.
When refinancing your private loans, ask the lender the following questions:
- Is the interest rate fixed or variable?
- Are there any fees?
- Are there pre-payment penalties?
- Are there discounts for on-time payments?
- Can you pay by credit card with no additional fees?
Where to start
Let help and see if refinancing is an option for you.
This is a sponsored post written for AfterCollege courtesy of Randi Mazzella on behalf of CollegeAve.