A good education is important, but it’s also costly. With the high price of college tuition, loans are inevitable for most students and unfortunately, this debt will need to be paid back for many years. If you are struggling to pay off your student loans, there are some student loan refinance options to help you get a handle on your finances.
There are two different types of student loans: federal and private and there are different student loan consolidation options for each.
Federal student loan consolidation
It is free to consolidate federal student loan debt from all the federal loan programs, so be careful if you come across a company who wants to charge a fee for this. There are many student loans, but the most common include Direct Subsidized Loans (loans to students who demonstrate financial need), Direct Unsubsidized Loans (loan to students with eligibility not based on financial need) and Direct PLUS Loans (loans to graduate students or parents of undergraduate students) among others. All of these loans and other federal loans can be combined through a Direct Consolidation Loan. When you consolidate your loans, the interest rate will be the weighted average of the rates you previously had on your loans and rounded up to the next 1/8 percent.
Here are some things to consider when looking to consolidate your student debt through this program:
Benefits of consolidating federal student loans
- There is no application fee and you can easily apply by filling out an online or paper application [PDF]
- All loans are combined into a single payment and one monthly bill.
- You can lower your monthly payment and get a longer time to pay the loan back.
There can be additional repayment plans or forgiveness programs through a federal consolidation program.
Cons of consolidating federal student loans
- Consolidation usually extends the term of your loan, so you will be paying longer and with more interest.
- When you consolidate, the outstanding interest becomes part of the principal balance, so you will likely have to pay more interest on a larger balance.
- You may also lose some benefits that are associated with your current federal loan such as rate discounts, rebates or cancellation.
Private student loan consolidation
Private student loans can’t be consolidated with federal loans. These are loans you get from banks or outside financial institutions. However, there are options for refinancing these types of education assistance loans.
- Home equity loans. If you’re a homeowner, this allows you to tap into the equity of your home to get cash to pay off the loan. You can choose a cash out refinance, which allows you to refinance your current mortgage for more than you owe and take out the difference in cash.
A home equity loan is a second loan with a fixed interest rate that you can take out to pay off the debt. A home equity line of credit (HELOC) gives you a credit line to take out what you need. You pay interest during the draw period, then principal and interest during repayment. During that time, interest rates may go up. All of these options use your home as collateral. Learn more about the differences between these mortgage options to see which may be right for you to restructure student loan debt.
- Outside lenders. These could be banks or other financial institutions who offer consolidation options for student loans. This means you would replace your multiple loans with one private loan and if the new loan has a lower interest rate, you could save money.
In order to qualify for private student loan refinancing, you need to:
- Be on time with current payments
- Have a good credit score
- Be employed in a stable job
If these qualifications are not possible, you could have someone co-sign with you like a parent.
There are a number of ways to consolidate your student loans. Look at the terms, interest rate and costs before you start the process to ensure you are choosing the right option for your needs.
Learn more by talking to a Freedom Mortgage loan advisor today!