With today's low interest rates, it can be prudent and strategic to refinance student loans. The advantages are especially good for borrowers who want to refinance student loans at better rates to save money. Considering that student loan debt surpassed $1.2 trillion in 2014, refinancing Federal or private loans can provide relief – providing the borrower can afford the new payments.
Qualifying requirements can vary by lender, making shopping around for the best rates essential in reducing monthly payments.
Private Lender Refinancing
The Department of Education does not offer refinance loan guarantees, so refinancing loans are private. The largest caveat in refinancing: Once Federal Stafford, PLUS and SLS, FISL, Perkins, Guaranteed Student Loans, and Direct loans are refinanced through a private lender, the borrower surrenders eligibility for Federal programs including loan forgiveness, forbearance, deferments, and income-based repayment provisions.
Typically lenders require proof of income and current FICO scores for a student loan refinance. The U.S. Department of Education hosts a free Repayment Estimator to help borrowers determine if they can afford the new payments. The key to securing a good student loan refinance, Forbes Magazine reports, is having excellent credit which can qualify the borrower for a standard repayment plan at the current low interest rates. The type of interest can also determine overall savings from a refinance. Variable interest rates are usually lower than fixed-interest refinancing rates. Considering today's low rates, it may be more prudent for students borrowing over the long haul to accept a fixed rate. And it can be especially beneficial in lowering fixed interest rates on student loans that were secured before the recession.
Banks, credit unions, and financial service companies offer student loan refinancing products, typically at rates that are lower than those charged for Federal student loan consolidation programs. Some lenders offer additional benefits such as loyalty incentives and lower rates if the borrower establishes automatic payment plans.
The Federal Direct Student Loan Consolidation Option
Loan consolidation programs lump all debt including student loans into a single bill that can reduce monthly payments and offer long-term extensions up to 30 years. The Federal Direct Consolidation Loan requires borrowers to have at least one Direct Loan or FFEL Program under repayment or in a grace period. The consolidation loans come with fixed-rate interest and there are no caps on their interest rates.
Borrowers participating in the Federal consolidation loan program also lose their privileges to Federal loan benefits including forbearance and repayment options including the standard repayment plan, graduated repayment plan, extended repayment plan, and income-based repayment plan. Find out more about the plusses and minuses of the Federal Direct Consolidation Loan at the Department of Education website.
According to the Department of Education, the following loans can be rolled together under a Federal Direct Consolidation Loan:
- Subsidized Federal Stafford Loans
- Unsubsidized Federal Stafford Loans
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct PLUS Loans
- PLUS loans from the Federal Family Education Loan (FFEL) Program
- Federal Perkins Loans
- Federal Nursing Loans
- Health Education Assistance Loans
- Supplemental Loans for Students (SLS)
Borrowers can pursue a Federal Direct Consolidation Loan when they graduate, if they leave college, or attain less than half-time status.