To Refi or Not to Refi Your Student Loans

How do you know if it is the right time or circumstance to refinance or consolidate your student loans?

Let’s start with the differences between Refinance and Federal Consolidation. The primary difference is that consolidation, in the technical sense, is only for federal student loans (although you may find some private lenders calling their refinancing product a "consolidation loan"), whereas refinancing can be for either federal or private student loans.

The student loan refinancing process involves a private lender that pays off one or more of your existing student loans and issues you a new loan. The terms and benefits of the old loans are no longer available, and this is important to note for students who have federal loans. If you think you will need to take advantage of federal programs like deferment, income-driven repayment, or even public service loan forgiveness, you will want to stick with your federal loans. Consolidation will allow you to keep those benefits. Parents, keep in mind that the benefits of Federal PLUS Loans are not as extensive as those of other types of federal education loans, so you may find that the benefits of refinancing those outweigh the risks.

If you have private higher-interest-rate loans, or you don't think you will take advantage of the federal repayment programs on your higher-cost federal student loans, refinancing may be right for you. People choose to refinance their student loans to lock in lower interest rates, convert variable-rate debt to fixed-rate debt, make monthly payments more manageable, remove or replace a cosigner,  and shorten (or lengthen) the overall repayment period.  If you have a great credit score, good credit history, and a full-time job, then you'll likely get more attractive terms from private lenders.  Even if your credit score and income are on the low side, you still may be eligible for a loan with good terms by refinancing with a cosigner.

If you are thinking of refinancing or consolidating, first ask yourself what your goals are for your student debt. Are you aiming to:

1. Reduce your monthly payment?
2. Reduce your interest rate?
3. Reduce your overall costs?
4. Fix the rate on your variable-rate loans?
5. Simplify repayment by dealing with a single lender?
6. Remove or replace a cosigner?

When considering refinancing, below is a list of questions that will help you determine if refinancing is right for you at this time and with a lender that best fits your needs.

1. What is the interest rate I will receive? (How does this compare to my current rates?)
2. Is the interest rate fixed or variable? (Be sure to compare apples to apples)
3. Can the interest rate or monthly payment ever change? (as with variable rates)
4. What are the fees? (origination fees, default fees, late payment fees, etc.)
5. Is there a pre-payment penalty?
6. What is the loan repayment term?
7. Are there loan limits?
8. Do I need a cosigner?
9. Are there any rate discounts available? (monthly auto-pay, residency, existing customer)
10. Are additional benefits offered, such as deferment, forbearance, or Income-Based Repayment during times of financial hardship?

Your goals are likely to determine the best course of action for your individual situation.  To learn more about refinancing and consolidation, and to decide if refinancing is right for you, download our REFINANCING GUIDE.