When financing any loan, it is important to consider all terms and obligations involved to make sure you are getting a better deal. Refinancing options for student loans are somewhat limited, and there are some significant differences between refinancing federal student loans and private student loans.
Federal student loan consolidation is only available for loans from the federal government, and therefore cannot be used with private loans. Interest rates for consolidated federal loans are calculated using the interest rates of your existing loans, then rounded up to the next “one-eighth of one percent.” Your new interest rate will not be higher than 8.25% and it will be fixed for the loan’s entire life. A calculator and short repayment survey are available at the Federal Loan Consolidation site.
If you would like to calculate your weighted average interest rate on your own, the steps are:
With private student loans, your interest rates will likely be affected by your credit score. If you have bad or nonexistent credit history, it will probably be difficult for you to secure a lower interest rate on your own. If you can find a willing participant, having someone cosign your loan can drastically lower your interest rates, provided your cosigner has a better credit rating than you do. Make sure that you and the cosigner review the loan’s terms very carefully, because they will be responsible for repayment if you fail to make payments.
As explained, private student loans cannot be consolidated with federal student loans. Even if you were able to arrange this, it is extremely unlikely that it would be to your advantage. Federal student loans are designed with low, fixed interest rates in mind, and it is doubtful that a private lender could match those rates. That said, private loan consolidation can be beneficial if you would like to make smaller monthly payments or have multiple private student loans. Your interest rate and other repayment terms will most likely depend on your credit score, so you might have to find a cosigner. Similar to federal consolidations, a consolidated private loan will enter into a new repayment period, so you could end up owing more interest throughout the life of the loan.
If you have private loans, look into available programs at your bank, credit union, or other non-government financial institution. They might have rewards or better repayment terms available to loyal members. Credit unions in particular tend to have lower interest rates than traditional banks.
Above all, make sure you look over your existing loans and carefully read your consolidation agreement before signing it. Since you could pay more interest over the course of the loan, it might be wise to stick with your existing repayment plan depending on the severity of your financial situation. Always talk to your lender if you anticipate problems making payments. This will help you avoid defaulting, and your loan provider may offer solutions to get you out of a rough spot.