If you've got a good job and are comfortable making your student loan payments, but you've got a dozen different loans at different interest rates, and some of those rates are higher than you’d like.
This is where you might consider consolidating or refinancing your student loans.
Federal Student Loans
If you just have federal student loans, consolidation is the way to go.
You can consolidate all of your federal student loans into a Direct Consolidation Loan. This will simplify your loans and give you one monthly payment. You can also extend the term of your consolidation loan up to 30 years, which may cost you more, but can reduce your monthly payment.
Your Direct Consolidation Loan has a fixed interest rate for the life of the loan. Depending on the prevailing interest rate on the consolidation loan and the rates of your existing loan, you may or may not save money by consolidating. Additionally, you’ll want to carefully examine if any of your original loans have benefits that will be lost upon consolidating.
Private Student Loans
If you have private student loans, you won’t be able to consolidate them using a federal Direct Consolidation Loan. You may, however, be able to refinance your private loans with another private lender.
Student loan refinancing might make sense if you have:
- A high percentage of private student loans
- Federal loans with high interest rates (8% to 12%)
You’ll want to be very careful before refinancing federal student loans with a private lender, because you’ll lose the benefits of federal loans such as deferment and forbearance, income-based repayment plans, and loan forgiveness if you would have qualified.
By refinancing, however, you can adjust the term of your loan between 10 and 25 years and may get a lower interest rate that might save you thousands over the long run.
You can cherry pick loans with the highest interest rates for refinancing. Selective refinancing can save on interest while retaining some of the perks of federal loans.
To qualify for student loan refinancing you’ll need:
- Good credit. Most lenders require at least a 700 FICO score; some will look at scores of 660 and up.
- A debt-to-income (DTI) ratio no higher than 35 percent. Some lenders may stretch to 45 percent. Calculate DTI by dividing the total of your monthly mortgage, student loan and credit card minimum payments by your gross monthly income.
- Verifiable employment for at least 12 to 24 months.
- Loans that were used to obtain a degree from an accredited institution.
In our next blog post, we will discuss what to do if you want to repay your loan as fast as possible.