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Federal Student Loans: To Refinance or Not?

Posted By:  |  May 10, 2016  |  0 Comment(s)

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Federal student loans offer many benefits over private student loans. They typically offer decent fixed interest rates and flexible repayment options. After graduation, however, many people wonder if they should refinance and consolidate all their student loans (federal and private) into one private loan.

For some people, this may be a great option to get out of student debt. For others, it might be best to stay clear of refinancing federal loans into a private loan. Which option is best really depends on your circumstances. You will first need to assess your financial situation and your goals for paying off your student loans.

Reasons to Refinance

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1. You have a great credit score

Having a high credit score can have many benefits. One of which is that companies will typically offer better interest rates. Having a lower interest rate means that you will pay less interest in the long run, and you will usually end up saving money. Companies will often offer you a great low-interest rate with a high credit score. Having a lower interest rate will probably save you money in the long run

2. You have a great paying job

Having a good paying job right out of college looks great to creditors. For this reason, they may also offer you a lower interest rate than your current federal loan. Having more disposable income means that you can pay more of the principal amount of the loan and thus get out of debt much quicker.

3. You plan on fully repaying the loan in the near future

The longer the term, the more interest you will pay in the long run. Private loans often have shorter repayment terms than federal loans. If one of your goals is to get out of debt as quickly as possible, this could be a good option. Of course, this would mean that you’ll need to have more money to put towards monthly payments because they may be higher. Overall, however, you’ll end up spending less of your hard-earned cash on repaying your loans.

Reasons Not to Refinance

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1. You will lose generous repayment options

The federal government has several different repayment plans for your federal student loans that can help you make payments even if your financial circumstances are tight. Refinancing your federal loans into a private loan means that you will give up these generous repayment for more stringent repayment terms.

2. You may not be able to save money

Saving money on repaying your student loans is dependent upon the interest rate, and how quickly you can pay it all back. If you don’t expect to make a lot of money out of college and have poor or no credit history, lenders will not give you a competitive interest rate. If this is the case, you may want to stick with repaying your federal loans.

3. Interest rates

Federal student loans offer the same fixed rate to everyone that applies. The current interest rate for undergraduates is 4.66%. When you choose to refinance federal loans, private lenders may not offer you a lower or comparable fixed rate. They might, however, offer you a lower variable interest rate. Variable interest rates are subject to change according to the market, so it could be a risky decision to give up a safe fixed rate for a variable rate.

 

The bottom line is that if you are in a secure financial position and want to eliminate your student debt as quickly as possible, refinancing your federal loans into a private loan is definitely a good option. You’ll want to make sure that you get a lower interest rate and even possibly a shorter repayment term. If you don’t fit into that category, it will be best to stick to your current repayment plan at least until you can build up your credit to where you can get a favorable interest rate.

Poll

  • How important is it to you for a debt consolidation company to offer financial education resources?
  • Takes your existing debt and try to settle with your creditors for a lower amount. If you pay off the settled amount, your debt will be considered paid in full.
  • Negotiates with your creditors on your behalf.
  • Fee based on a percentage of your total starting debt or a percentage of the debt they save you.
  • Most settlement companies have you create a separate "escrow" account where you will make monthly contributions over a certain amount of time to contribute to your settlement. Once there is a substantial amount of funds to show your creditors, the settlement company will try to negotiate a lower amount of debt.
  • Combines all your debts and creditors into one monthly payment.
  • Allows you to pay one monthly payment to the consolidation company, instead of multiple payments to different creditors.
  • You no longer owe your original creditors; instead you pay one monthly payment to your consolidation company.
  • Consolidation companies can help negotiate lower interest rates on your debts and help lower your total debt payment in the long run. A lower interest rate will lower the amount you owe in the end.
  • Allows you to consolidate all your different debts into one personal loan that can be paid off over time.
  • Can offer borrowers a lower interest rate with a longer payback term (compared to high-interest credit cards or medical bills). This will lower the amount of money required to pay off the loan over time.
  • Personal loan debt consolidation can be an effective way to raise your credit score quickly (within 3-6 months).
  • Borrowers can receive funds from their loan within only a few days.

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