As we discussed in a previous article, private student loans can be an option to help students cover the costs of their education. However, they often lack the repayment options that federal student loans offer.
Even so, it is possible to refinance and/or consolidate your student loans through a private lender.
Consolidating vs. Refinancing
These terms can be thrown around a lot, but it’s important to remember that they are not the same thing. Refinancing entails having your current lender (or a new lender) offer you a new loan with terms that are (hopefully) more favorable.
Consolidating means that you are taking multiple smaller loans and combining them into one larger loan. This has the benefit of reducing the number of payments that you make each month, and you may also be able to negotiate a lower overall interest rate, but make sure you don’t pay more in interest when you consolidate.
Refinancing your student loans can help you to pay off your loans at a lower interest rate. It may also allow you to extend the term of your loan so that you can pay less each month. However, keep in mind the longer the payment period, the more you’ll pay in interest.
Who Can Refinance?
Like any kind of credit, student loan refinancing isn’t guaranteed. Banks and other lenders will look at your credit history and your financial situation to determine whether or not you are eligible for a refinancing program. They will also use your credit history to determine what kind of interest rate they can offer.
Lenders will be looking at factors like your income, your credit score, and your debt-to-income ratio, so before you inquire about refinancing, it might be a good idea to pull your free credit score, or talk to a certified credit counselor to assess your strength as a borrower.
Which Loans Can You Refinance?
Technically you can refinance any of your student loans with a private lender. If you can get a better interest rate, it may be beneficial to refinance or consolidate your federal student loans with a private lender. However, once you refinance your federal loan, you lose access to the repayment and loan forgiveness options that are available with federal loans.
Also keep in mind that you cannot take out a federal student loan to refinance a private loan.
Applying to Refinance
The good news is that it there are lots of options when it comes to student loan refinancing. You can talk to your local bank or credit union, and there are more services available that will allow you to comparison shop for rates. Keep in mind, it’s a good idea to apply to multiple lenders within a 30-day window. This approach is known as “rate shopping” and allows you to avoid taking a hit on your credit.
As an added benefit, if your application isn’t accepted, you can find out why simply by asking the lender. They are legally required to send you an “Adverse Action” notice, which should explain exactly why you weren’t approved.
That way, you can take steps to improve your credit or financial profile so that you can get a better rate in the future.
Know the Terms
Remember, before you agree to refinance your loan, make sure that you’re getting a good deal. Is the interest rate fixed or variable? If it’s variable, it’s likely that your interest rate will go up over time. Make sure you know how long your repayment term is and all the terms of your new loan. Otherwise you could end up in worse condition than before.
Looking for more help understanding and managing your student loans? Schedule an appointment with one of our student loan counselors today or call us at 800-920-2262.