Refinancing Student Loans

Refinancing student loans is a bit different than refinancing other types of debt, such as business loans or credit card debt, for example. The normal way for student loans to be refinanced is through a student loan consolidation. Since most students who are financing their education through borrowing money tend to take out a number of separate loans during their college career, it is typical that all these loans be refinanced, or consolidated together into one

loan after the student finishes school. This is because having one loan is easier to handle than five or six separate loans, and the one payment from the consolidated loan will be less than the sum of the individual loan payments. Sometimes an overall lower interest rate can be arranged as well. There are, however, a number of things to be aware of if you think you will ever need to be refinancing your student loans at some point.

Differences in Refinancing Federal vs. Private Student Loans

There are large differences in refinancing or consolidating federally guaranteed student loans vs. private student loans. Federal student loans are always more favorable for the borrower than are private loans, and these should be pursued first. A good goal would be to avoid private student loans if at all possible. With federal student loans, such as Stafford loans, Perkins loans, or Parent PLUS loans, when it comes time for refinancing or consolidation, if the borrower meets the qualifications for doing so the lender must grant the refinancing or consolidation. This is not the case with private loans where the lending company can simply deny the request for any reason or no reason. In this case the borrower who expected to have only one loan to deal with when it came time for loan repayment might now be stuck with paying off four or five loans, and the total payments might be more than he or she can handle. So this difference between federal and private loans is important.

Deference, Forbearance, and Income Based Repayment Plans

In addition with federally guaranteed loans that are refinanced or consolidated, the borrower has the right to delay payments if he or she gets into some financial difficulty in the future and needs to buy some time to get their finances in order. This can happen if a person loses a job or suddenly becomes sick and temporarily does not have the earning power they did before. The tools to accomplish this with federal student loans are through deferment or forbearance, and there are also options available with federal loans for students to modify their repayment plans and have them based on the amount of money they are actually earning, and some of these plans can lead to low monthly payments indeed, even as low as $25 per month theoretically. Of course stretching out payments means that is will take longer to pay off the student loans, but anything is better than going into default. People who default on student loans are opening the door for huge penalties and collection fees, not to mention the harassment of collection agencies. So borrowers should know their rights and avoid default on student loans. Once again, these rights to deferment and forbearance and the various repayment options are only available with federal loans. With private loans all this is up to the lender, and lenders also do not have restrictions on the interest rates they can charge for any refinancing of student loans they do accept. With federal loans the interest rates are set by the weighted average of the individual loans undergoing student loan refinancing.

Finally borrowers need to be cognizant of the fact that once they have undergone student loan refinancing, or consolidation, it can only be done once. This is true for the refinancing of both federal and private student loans. When it comes to refinancing your student loans, you must know your rights and your options in order to avoid extending yourself and getting into serious financial trouble.