When entering college most student loan applicants are treated equally, as far as interest rate and repayment terms. Once you’ve graduated and established yourself in the financial world, you should have built some responsible financial habits. We mean you pay your bills on time, pay over the minimum amount, and overall don’t put yourself in a bad or risky financial situation. All these things help to improve your credit.
When you’ve established a solid borrowing history, it can really benefit to look into refinancing or consolidating your remaining student loan debt. By “benefit” we mean you could see substantial savings on your student loan debt, but how do you know what’s best for you? Refinancing and consolidating student loan debt can be complicated so let’s take a look at the benefits of each.
Student Loan Debt Consolidation
Consolidation is taking multiple loans and combining them into one. This provides one easy and simple payment instead of having multiple different payments due for each loan. When consolidating your student loan debt it’s common for borrowers to extend the life of their loan to have a lower monthly payment. Be cautious though this may look like an attractive and smart idea you may end up paying longer over the entire life of the loan. Typically, when consolidating you can lose out on benefits like principle rebates or loan cancellation, because you’re using a different lender.
If loans with different interest rates are being consolidated what interest rate does that leave you with? When you consolidate multiple loans together the interest rates will change. Lenders will use the weighted average of all your interest rates. The term of the repayment can also change. Be aware that there are federal student loan consolidations and private student loan consolidations.
Private loans are not eligible for consolidation through the government. It’s important to note here that once you consolidate your student loans through the federal government they cannot be reconsolidated through the federal government again unless an additional loan has been added. To qualify for federal student loans you must meet the below criteria:
- Leave school, graduate, or become a part-time student
- Have the loan types listed here to qualify
- Loans must be in repayment or in the grace period
Consolidating your federal loans can lower your monthly payment, you may have access to Income-Based Repayment depending on the type of loans you have, and variable-rate loans can be switched to fixed interest rate loans or the weighted average of the interest rates on loans being consolidated, rounded to the nearest one-eighth of one percent. Now that we understand what federal student loan consolidation is like, let’s review private student loan consolidation.
Private Student Loan Debt Consolidation
Private lender requirements will vary based on the lenders available. It’s important to understand that private lenders will have different ways to qualify borrowers. You may be approved for consolidation with one company and not with another. When you are looking for private consolidation on your loans take into consideration the ability to refinance. When you refinance with a private lender there are multiple benefits.
Refinancing Student Loan Debt
What to Know-
Refinancing is combining multiple student loans into one. You can pick and choose which loans you want to refinance and which loans not to include. The main benefit to refinancing is not only for one convenient payment but you can receive favorable interest rates and change the repayment terms, thus allowing borrowers to receive less interest accrual over time. Before considering refinancing your student loan debt you want to make sure you meet the below:
- Steady and favorable income
- Income doesn’t include bonuses
- Good credit score
- You have a good debt to income ratio
Be aware that if you’re seeking Public Service Student Loan Forgiveness, if you refinance with a private lender you will be losing that ability. Don’t think that as a borrower you need to choose between refinancing with a private lender and federal student loan consolidation. You can pick and choose what loans to consolidate and which loans to refinance based on your unique situation.