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Refinancing Your Student Loans? What You Need to Know

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With outstanding student loan debt at nearly $1.4 trillion and rising, you wouldn’t be hard-pressed to find people who think student loans are a big problem for Americans. Student loan refinancing isn’t a catch-all solution to the issue, but it’s one of the strategies for paying off student loans while allowing existing borrowers to save money on their high-interest loans.

Can I Refinance My Student Loans?

The short answer is yes, you can. However, you need to understand your options fully before committing to any solution.Consolidation and refinancing are often used interchangeably, but they are not the same procedure. Consolidation is a process offered by the federal government, while refinancing is done strictly in the private sector.

What Is Student Loan Consolidation?

Consolidating your student loans means that multiple loan agreements are compacted into a single agreement. If you consolidate federal student loans, your interest rate will be calculated by averaging the rates of your original loans through a weighted scaling. With a federal Direct consolidation loan, you can lower your monthly payments by extending your loan repayment term to up to 30 years (though this may mean you pay more in interest over the life of the loan), and the interest rate will then be rounded up to the highest eighth of a percentage point. Federal consolidation loans have a fixed interest rate.

One of the advantages of consolidating your federal student loans is that you may qualify for loan forgiveness options or additional repayment options. At the same time, consolidating may cause you to lose borrower benefits associated with your original loans. Before you apply for a federal consolidation loan, ask about how it will affect your borrower benefits and your loan costs. You can ask your student loan servicer or call the Education Department’s Loan Consolidation Information Call Center at 1-800-557-7392.

What Does it Mean to Refinance Your Student Loans?

Unlike consolidation, refinancing your student loans in the private sector will completely change the terms of your loan. (Though some legislators have fought for it, there is no option for refinancing student loans within the federal student loan system.)

You may be able to take advantage of a lower interest rate, because you are, in effect, taking on an entirely new loan. Your ability to refinance your loan will depend on your credit standing and your ability to repay the loan, so before you apply, find out what you can about the lender’s underwriting criteria, and see where your credit stands. Also, keep in mind that, if you’ve already fallen behind on your student loan repayments, it could’ve hurt your credit significantly enough to keep you from being able to refinance. You can find out more about how your student loans impact your credit here. (You can also get a free snapshot of your credit report, including two of your credit scores to see exactly where your credit stands.)

Keep in mind that refinancing your loans means you’ll lose the borrower benefits associated with your original loan. Make sure you understand the terms of the loan before you apply for it — like if you can postpone payments if you lose your job or if you can get the loans discharged if you become totally and permanently disabled. Once you refinance a federal student loan with a private student loan, there’s no way to reverse the action.

No matter if you choose to consolidate your student loans, apply to refinance your debt with a private lender or take advantage of one of the many student loan repayment options available to federal loan borrowers, it’s crucial to continue making your payments on time. Late loan payments can seriously damage your credit and hurt your ability to take out a car loan, buy a house or get a credit card, among other things.


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