After the excitement of graduating from college, the reality of student loan repayment starts to sink in. While most federal student loans come with a grace period to allow you to find employment before you have to start repaying your loans, you are still probably trying to figure out the best way to eventually pay them off.
And if you’re like many college students, maybe you’ve taken out a mix of federal and private student loans and are wondering what rules apply to each. To help, we’ll explore your options when it comes to paying off your private loans, and explain the difference between student loan consolidation and refinancing.
Can you refinance private student loans?
The short answer is “yes,” although you’ll need to choose a company that offers private student loan refinancing. If you want to end up with just one payment—and if you also have federal student loans—the lender that you choose must allow you to refinance both federal and private student loans together. Some do, while others don’t.
Before you refinance federal loans, make sure you understand what benefits you may be eliminating by doing so, such as deferment, forbearance, or income-based repayment plans.
When you refinance loans at a lower rate, you could reduce the amount of money you spend over the life of the loan, especially if you are also able to shorten the term of the loan. Or if you want to lower your monthly payments to free up your cash flow, you may be able to extend the term of the loan, which could end up costing you more money over the long-term.
When you refinance, you often have the option of choosing between a fixed-rate or variable-rate loan, and you’ll probably want to strategically make that decision.
• have the same interest rate throughout the life of the loan
• are not affected by interest rate changes, up or down
• typically have a higher interest rate than the variable loan rate
• typically come with a lower initial rate than the current fixed rate
• fluctuate or “float” based on interest rate changes, up or down
• vary based on the movement of an index, which could be the prime rate or the Intercontinental Exchange London Interbank Offered Rate (LIBOR)
Some people feel more comfortable with a fixed rate. It can make it easier for you to budget, since the payment amount typically doesn’t change throughout the life of the loan (unless you’re late on or miss payments, which can result in extra fees and potentially a higher interest rate).
But here’s something else to consider: If you plan to pay off your balance reasonably quickly, then choosing the variable rate might be a better decision, since it typically comes with a lower starting rate, and a relatively quick payoff could help reduce the money you spend on interest. For example, if you’re paying off your loan in a year and feel somewhat confident that interest rates won’t skyrocket, a variable-rate loan may be right for you.
However, if you’re paying off your loan over 10 years, you’re less likely to know what the interest rates will be doing over the course of the next decade, in which case a fixed-rate loan may be safer. If you ultimately decide to go with a variable loan, ask your lender how much the rate can change each time (or its “cap”).
When choosing the best term, it’s important to think about what cash flow you’ll need to meet your other financial commitments, both now and in the foreseeable future. Then, choose a term that works for your budget, remembering that the shorter the term, the less interest you pay back overall.
Finally, here’s another consideration: When you first get out of college, you may have a lower salary and you may need to also save up for bigger purchases like a down payment on a house, and so forth. In that case, it can make sense to refinance to a longer term—and then, once your cash flow is better, you can refinance again with a shorter term.
Private Student Loan Consolidation
When you refinance student loans, as described above, you can end up with one payment. When you consolidate them, you may also end up with one payment and, because of this similarity, it’s easy to confuse the two processes. So, to clear up any potential confusion, here’s an overview of how student loan consolidation works.
If you have federal loans, you might be able to consolidate them into one loan through a federal program called Direct Loan Consolidation , with the resulting interest rate being the weighted average of all the loans’ original rates.
Through this process, you gain the convenience of only having one payment, but you don’t generally save a lot of money. It can appear you do if you lengthen your loan term, because the monthly payment can go down—but that just means you’ll pay more in interest, overall.
In general, you can’t use Direct Loan Consolidation to consolidate private student loans with federal ones, which entirely defeats the purpose of trying to combine all your loans into one payment.
And take a close look at offers to “consolidate” private loans; some of them can be fishy and rather than averaging your original rates, they offer an entirely different rate—which isn’t really effective student loan consolidation.
Returning to Student Loan Refinancing
When you refinance, you can combine federal and private loans into one payment—which is just like consolidation. But as opposed to having to accept a weighted average of your loans’ original rates, you may qualify for a lower interest rate. The catch is that your federal loans will no longer qualify for federal protections such as deferment or forbearance.
If your goal is to combine your student loans into one easy payment, and you are well-qualified as a potential borrower, refinancing just makes good sense. You can lower your interest rate, which lowers your payment, and you can typically choose between fixed rates and variable rates for even more payoff flexibility.
You can select a shorter term to pay off debt more quickly and reduce the total amount of interest paid, or a longer one with lower payments to boost your available cash flow. Here are a few commonly asked questions about refinancing, and how we answer them at SoFi.
What happens if I lose my job?
This can be pretty scary when you have student debt. Some private student loans have a deferment feature and most federal programs have one. During deferment, payments may be decreased or even suspended, but interest usually continues to accrue.
And that means a new issue can arise: how to get your loans out of deferment or forbearance as soon as possible. At SoFi, we combine forbearance with a powerful job search strategy. Here’s more information about our SoFi Unemployment Protection that includes helping you find the right new job.
If I pay off these loans too quickly, will it hurt my credit report?
It’s true that having open loans that you pay on time can have a positive impact on your credit score, and it’s also true that your credit rating can be positively impacted when you effectively manage your payments. And paying off loans on time can be seen as effectively managing your debt.
Ultimately, paying off your loans earlier than planned is unlikely to be cause for concern. If you pay off your loans ahead of schedule, you can celebrate your freed-up cash flow, and how much easier it may be to save for important purchases—perhaps for a house—now that you’re debt-free.
Refinance Private Student Loans with SoFi
SoFi is the leading student loan refinancing provider. You can apply for refinancing quickly and easily online, and there are no application fees, no origination fees, and no prepayment fees.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit.
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