Refinance Student Loans

With the price of education skyrocketing these days, especially in the U.S., student loans can be an onerous burden for many adults just starting their careers. Refinancing your debts, and consolidating them into one low-interest loan may help make your month-to-month payments easier, and save you thousands of dollars over the lifespan of the loan.

Steps

Comparing Federal and Private Loans

1. Evaluate your loans. Federally-guaranteed student loans are funded by the government and have a number of benefits. Private student loans can come from a variety of lenders including banks, credit unions, state agencies, or schools. Generally federal student loans have lower interest rates than private loans. Some federal loans also allow for a grace period upon graduation. For example, a Stafford Loan has a six month grace period so that you don’t need to begin repaying the loan immediately after graduating. Most private loans do not offer a grace period and you need to begin to pay them back as soon as you graduate.
   • If you have multiple loans, pay off loans with a higher interest rate first so that you don’t accumulate more debt.
2. Tie your monthly payment to your income. Some federal student loans will allow you to create a repayment plan that is based on your income. For example, your monthly repayments will directly reflect the amount of money that you make which will ensure that you can afford to pay off your student debt. If you have a private loan you will need to talk to your lender to determine if they can create an income based repayment plan.
3. Visit the United States Department of Education's Direct Loan Program online. Direct Loans are funded by the U.S. Department of Education through your school and are managed by a loan servicer, under the supervision of the department. The Direct Loan Program allows you to choose your repayment plan and to switch your plan if your needs change.
   • Take advantage of your public service career. The College Cost Reduction and Access Act of 2007 established a public service loan forgiveness program that discharges any remaining debt after 10 years of full-time employment in public service.
   • You must have made 120 payments as part of the direct loan program in order to obtain this benefit.
   • Only payments made on or after October 1, 2007 count toward the required 120 monthly payments.
   • Borrowers may consolidate into Direct Lending in order to qualify for this loan forgiveness program starting July 1, 2008.

Evaluating Lenders and Offers

1. Contact your current lender. The market for loans is very competitive these days, and after years of high unemployment, a borrower with a good credit history is a valuable asset. If your credit is good, your lender may find value in either lowering your interest rate, or extending your loan period in order to retain your business.
   • You will likely need to provide your lender with proof of employment in order to assure them that you will be able to pay your loan.
   • You will also need to give the lender your credit score so that they can evaluate how well you have managed debt in the past.
2. Contact a local bank. More and more people are moving away from the big banks, and finding a great deal of satisfaction in community banks and local credit unions. Talk to the loan officers there about the potential for refinancing your loans locally. They may be able to help you, or at the very least offer further guidance or a referral.
3. Choose the repayment option with the shortest term length. If you are refinancing your loan in order to decrease the amount of interest you are paying then you should choose the option with the shortest term length. This will likely increase your monthly payments, but if you can afford to pay more it is an excellent idea to shorten the length of your loan so that you pay less interest.
   • You can also pay off more than the monthly minimums as a way to speed up the repayment process.
4. Compare borrower protections between lenders. One thing to look for when comparing refinancing options between lenders is different types of borrower protection. For example, look for lenders that have deferment, forbearance, or flexible repayment options. Even if you don’t currently need those options, because you can easily make the monthly payments, they are always a good idea to have. You never know if you will encounter a financial pitfall at some point.
   • Divorce, job loss, a mortgage, or additional children can all impact your ability to pay off your student loan.
5. Consider loan consolidation. If you have multiple different loans try consolidating them. This makes it easier to pay off because all of your loans are combined into one monthly payment. Balance the difference in the costs between consolidating all loans together versus consolidating only the private loans and keeping federally-funded loans separate.
   • Consolidating loans can also help to lower the payment and interest rates.
   • Keep in mind that when you consolidate your loans this will typically make the payment period longer, which will cost more money overall.
6. Choose the best consolidation offer for you. When comparing offers of consolidation you should look for the lowest interest rate possible. You may also need to decide between a fixed or variable interest rate. This is typically left up to personal preference. A fixed rate will stay the same throughout the entire term and is usually higher and a variable interest rate will often start lower, but may raise throughout the term of the loan.

Assessing Your Finances

1. Determine why you need to refinance your student loan. It's a good idea to have a clear understanding of how much student debt you have and what some of the possible solutions are prior to refinancing your loans. You may be refinancing simply to reduce your debt or interest payments, or you may be refinancing because you want to consolidate multiple loans into a single debt and payment structure.
   • While it's important to have a goal in either case, knowing how much you can actually afford will make all the difference when shopping for an refinancing solution.
2. Create a balance sheet totalling all of your sources of income, and all of your expenses. Track your income and expenses in great detail for an entire month, so that you have an accurate gauge of how much you're spending versus how much you are bringing in. This will help you determine how much you can afford to pay monthly in student loans. Test out these budget applications to help track your monthly budget:
   • You Need a Budget
   • Budget Pulse
   • PocketSmith
3. Request a Get-Your-Credit-Report-for-Free. Before you go shopping for any sort of loan, know your credit score. The higher it is, the more bargaining power you have with lenders, so it's important to maintain good credit.
   • If your credit is not as good as it could be, devote a few months to bringing it back up. The money you save in interest and fees, in the long run, will be well worth the effort.
4. Evaluate your student loan at different stages in your life. Once you have settled on a repayment plan it is important to reassess that plan periodically. For example, as you begin to earn more money you may want to start paying off your loan at a faster rate. Similarly marriage, buying a home, and having children may change the amount that you can afford to pay towards your student debt on a monthly bases. It is important that you constantly assess your financial situation and adjust your payment structure accordingly.
   • Typically you can not make changes to your repayment structure more than once per year.

Tips

• Student loans carry certain tax benefits, and refinancing them may have unexpected ramifications in the form of higher taxes. While your accountant or tax advisor can give you personalized guidance, click here to see a general tax guide for student loans.
• Once you have successfully refinanced your loan, try and make the same payment you did before you refinanced. This will reduce the term of the loan and get you out of debt faster.

Related Articles

• Compare Unsubsidized vs. Subsidized Student Loans
• Get a Rebate on Consolidated Student Loans
• Choose a Student Loan Repayment Plan
• Get Student Loans out of Default

Sources and Citations

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