Graduates regularly consider refinancing student loans to benefit from a lower interest rate, simplify finances and/or reduce monthly repayments. However, there are a number of important considerations before signing-up to a debt consolidation loan. Federal and bank loans have very different terms so it is imperative that the borrower has a thorough understanding of the various pros and cons before deciding.
Refinancing Student Loans
Student loan debt consolidation involves putting lots of different loans under one roof and making a single repayment each month. Unlike other sources of borrowing, it is only possible to consolidate student debt once. Turning federal debt into a private loan can remove access to debt forgiveness programs, loan deferment or possibly forbearance. These are very useful ways to avoid student loan default.
Student Loan Interest Rates
Whether consolidating student debt is the right option will depend heavily upon whether the loan is from the federal government or a financial institution. Whilst a private loan will simplify finances, interest will normally be higher than on a Perkins or Stafford loan. However, given the low interest rate, refinancing private student bank loans may make repayments more affordable.
Simplify Family Finances
Applying for a federal loan each year will have meant yet another separate loan agreement. Combine this with various loans from banks and the borrower can wind up making a number of separate repayments. Refinancing student loans will mean that a single payment is made to the lender. Simplified finances may mean that fewer late payment charges are made as it is easier to remember to make payment.
Reduce Monthly Repayments
The majority of federal loans have a standard term of 10 years. Consolidating student loans means that a borrower is able to spread the cost of repayment over a term of up to 30 years. Whilst this improves affordability and increases the amount of disposable income available each month, it is also increases the cumulative interest paid over the life of the loan. A lot of bad things can happen to someone in the space of 30 years.
Refinancing student loans has a number of benefits, but turning Perkins and Stafford loans into a single private bank loan may not be a good long term move. Not only is the rate of interest higher, but there are a number of different features designed to help a struggling borrower that will be lost. Those with a higher proportion of private loans have vastly more to gain. Think carefully before further extending the repayment term.
Sources
"Loan consolidation." Federal Student Aid.
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