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Refinance Your Student Loan
by Sarah Russell
If you’ve recently graduated from college, you’ve probably been bombarded with mailings
and advertisements urging you to refinance (or consolidate) your student loans right away.
But wait, what is loan consolidation? And why should you do it?
If you’ve just graduated from college, you’ve probably got a number of different student
loans, all in different amounts from different lenders at different interest rates. Loan
consolidators (which can be private banks, lenders or government agencies) pay off all
your individual loans in exchange for a single loan in the same amount issued to you. So
now instead of all those different loans, you’ve got one loan that you repay to the
consolidator.
Refinancing your student loans reduces your monthly payments and locks in a fixed interest
rate. In most cases, student loans have variable interest rates set a few points below
prime. As interest rates go up, so will the interest rate on your loans. When you refinance
your loans, you lock in an interest rate based on the current market conditions that will
be set for the life of your loan. Therefore, it’s important to evaluate the market before
making the decision to consolidate. Right now, interest rates are low, but they’re going
up and most economists predict that they’ll continue to go up for awhile. So for many
people, this is a good time to refinance.
Your credit history will also determine your eligibility for loan consolidation programs.
Loan consolidators can be picky in who they accept for their programs, so the option to
refinance is usually only available to individuals who have established good credit by
paying their loans back on time. If you’ve missed payments or made payments consistently
late, you may not be offered the best terms, if you’re accepted at all. If your application
is denied the first time, call the consolidator and talk to a loan officer about the reason
for your rejection. The officer may offer you advice on how to qualify for their program
at a later date.
If you decide to refinance, be sure to consolidate federal loans and private loans
separately from each other. When you consolidate your loans, you’re typically offered
a rate that’s 1-2% lower than the average rate of your loans. Federal student loans
often carry much lower interest rates than private loans, so consolidating them together
can bring up the average interest rate of your loans and leave you with a higher fixed
rate locked in. If you only have one private loan, it may not make a difference, but
it’s important to assess your options before committing to refinance.
Is there anyone who shouldn’t consolidate? Let’s look at a scenario. Tracy has 2 loans
for $5,000 each that are scheduled to be paid off within 5 years. She can afford to make
her monthly payments but wants to see if she can save a little extra cash each month by
consolidating. She finds out that she can refinance the loans into a $10,000 consolidation
loan to lower her monthly payments and she’ll be eligible to extend her payments over 8
years. But because she’s extended the life of her loans, she’ll be paying interest over
a longer period of time and may wind up paying more overall than if she had kept her
loans as they were.
It is tempting to pay less per month but if you can afford to pay off your loans in
a shorter period of time, then you’ll likely save money on interest in the long run.
Obviously every situation is different and you won’t find all your answers in a short
article like this. But if you think loan consolidation might be right for you, check
out the Student Loan Network’s site at Studentloanconsolidator.com for more information
or speak with a loan officer or financial planner to see what your options are.
About The Author
This article was published by Sarah Russell on Smart Young Money – a collection of money
management resources for teens and young adults. For great information on using credit,
managing debt and more for young people, visit
http://www.smartyoungmoney.com.
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