When and How to Refinance Your Student Loans

The Growing Debt Trend

Student loan debt may well be at an all-time high, if college tuition is indication of anything. When all is said and done, most new college grads struggle to balance multiple student loan repayments. While jobs for new grads show more promise than in the recent past--especially those in the worlds of business, technology, and economics and finance-- new grads in other fields often lack income to make ends meet.

Out of hand student loans can quickly overtake even the most well-intentioned borrower. In today’s student loan world the options for refinancing are too many to let loans fall into default. A simple refinance strategy can save one’s financial future.

Refinance: What it Means

Student loan refinance is nothing new, but it has become much more commonplace. Borrowers with one or more student loans may apply to a lender for a refinance option. When one refinances, the lender essentially pays off the original loan(s) and refinances a loan to take their place. Replacement loans feature extended repayment periods, lower interest rates, and sometimes further borrower perks.

Many other types of loans may be refinanced: mortgages, auto and boat loans among other top dollar items. While these continue to be termed “refinance” loans, for the most part student loans are instead consolidated.

Consolidation as Means to Refinance

Consolidation is a more descriptive action for student loans. Typically borrowers seek to refinance student loans because there are multiple loans involved that are literally consolidated into one refinanced loan. But consolidation provides a more flexible financial tool with which to manage one’s outstanding debt than a simple refinance loan.

Student consolidation loans usually fall into one of two categories, federal or private—sometimes called alternative. The different loan types as I outlined in “Direct, Federal, and Alternative Student Loan Programs and Applications” are kept together, accorded their own brand of consolidation loan. Regardless of category either flavor gives borrowers lower interest rates and extended repayment periods that can make all the difference to their monthly bottom line.

Are You a Refinance Candidate?

Before a borrower makes a long-term financial commitment, such as refinance or student loan consolidation, he or she must be willing to self-analyze their finances in the short-term and long-term:

• Are my monthly payments getting out of hand?
• How many student loans do I have? How many lenders?
• What are the interest rates?
• Do I have other non-negotiable monthly bills?

This is a sample of the most basic questions a borrower should consider prior to consolidation. The next step is a conversation with a lender that specializes in student loans and offers a consolidation loan product; better yet if this individual is acquainted with your personal financial situation.

What Consolidation Can Do For You

In the hands of the right borrower low-rate student loan consolidation is a boon. A Direct Federal Consolidation Loan or Federal Consolidation Loan through an FFELP lender both come bundled with a fixed interest rate that is calculated based on the weighted average of a borrower’s federal loan rates. This interest rate will not exceed 8.25 percent. Loans are not subject to credit check and some lenders discount interest rates to those borrowers that consolidate during their new-grad grace period.

A couple of features not available in an ordinary refinance loan that offer flexibility for student loan consolidation borrowers include: period to add on further loans, and deferment and repayment options.

Risks to Refinance

Of course for every good reason to refinance or consolidate student loans there are just as many arguments against. For example, borrowers must be able to make a good argument for a consolidation that appeals in the long-term as well as the short-term. Consider the fact that the loans will end up costing exorbitantly more, once repayment period is extended and interest is applied, than if the initial loans were paid through their original repayment terms.

For further details on types of consolidation loans, read my article, “Government and Direct Private Student Loan Consolidation Programs.”