Student Loan Refinancing and Consolidation

Student debt basics

Secondary education is expensive and figuring out how to fund it can be confusing. The average American college student will graduate with nearly $30,000 in student loans. These loans are federal or private funding that students may use to pay for tuition, supplies, living expenses, and books during their secondary education. A loan is disbursed to the student’s school, and all expenses charged by the school will be deducted before the remainder is given to the student. Students, prospective students, and graduates should research and decide how to manage this debt through the various means federal and private institutions offer.

Terms to know

Before you can understand your options, review these financial terms and what they might mean for your repayment plan.

• Principal: The principal is the initial amount someone borrows. This is the total amount that will be disbursed to a school to pay off fees.
• Interest: The interest is the cost of borrowing the principal. Many loans charge a monthly, predetermined percentage rate of the principal that is added to the cost of the loan.
• APR: APR stands for Annual Percentage Rate and is the amount of interest customers will pay annually on their loan. If you are applying for federal loans, direct subsidized loans will have lower APR than direct unsubsidized.
• Minimum Payment: The minimum payment is the smallest monthly payment amount a customer will need to pay to have no late fees and maintain a good credit history. However, paying only the minimum payment will allow interest to accrue on the principal, building debt.

Types of Student Debt Services

Student loan companies offer several services to help customers finance their futures. Know which types apply to you.

• Private loans — Lenders such as credit unions, banks, and schools provide students and parents with loans to complete education. Private loan companies give loans based on a customer’s creditworthiness and therefore might require a credit pull or a cosigner.  
• Federal loans — The federal government provides loans for students and parents. To qualify, students and parents must fill out the FAFSA. Basic criteria for aid eligibility include being a U.S. citizen or eligible noncitizen, having a high school diploma or GED certificate, and having proof of enrollment in a degree or certificate program.
  
  • Direct Subsidized — Undergraduate students with financial need might be eligible for a Direct Subsidized Loan. Your school determines the amount you will receive based off this need, and students will not have interest on this type of loan when they are in school at least half-time. When a student leaves school, interest will begin accruing after six months if the student has not applied and been accepted for deferment.
  • Direct Unsubsidized — Graduate and undergraduate students may be eligible for Direct Unsubsidized Loans. Interest on a Direct Unsubsidized Loan will still accrue when a student is in school.
  • Direct PLUS — Parents of undergraduate students and students pursuing graduate or other professional degrees may apply for a Direct PLUS loan. These loans are administered based on creditworthiness and, like Direct Unsubsidized Loans, accrue interest while a student is in school.
• Debt counseling — While debt counseling is an optional service that is not provided by all student loan companies, federal loans require consumers to complete debt counseling before accepting a loan. Customers should seek their personalized debt counseling from a professional if they are unsure of how to manage student debt.

Loan consolidation and refinancing

Customers may be wondering the best way to transfer a loan to a recently graduated student, or they may be a graduate themselves seeking a way to lower interest rates or simplify loan repayment. Many private student loan companies offer opportunities for loan consolidation or refinancing.

Loan companies can consolidate multiple federal loans into one loan. Consolidation will not impact repayment terms such as interest rate. This is an option for federal loan holders because the U.S. Department of Education offers the Direct Consolidation Loan. Private companies that offer this service may have fewer deferment and loan forgiveness opportunities than federal consolidation plans, but it could allow you to extend your loan terms and bundle multiple loan payments into a single payment for easier payment. Weigh the pros and cons of your consolidation options before choosing whether to consolidate with a private company.

Loan companies can also refinance single or multiple federal or private loans into one loan with a better interest rate or repayment terms. Refinancing is the only option for private student loans. Customers with a higher credit score than when they took out their original student loans will find that refinancing can offer them better interest rates.

Deferment, forbearance, or defaulting

Circumstances may prevent a student from repaying loans. Certain arrangements will allow customers to postpone their loans until they are ready to resume payment.

Students may postpone payments on their loans by deferring. Payments will be paused for the principal and, in some cases, the interest of the loan. Some companies allow students to defer loans when they are in trainings, military deployment, fellowships, or unemployed. For federal loans, students fill out and submit a deferment form. Private loans may also allow students to defer, but deferment circumstances may differ, and private institutions might charge additional fees for deferment. In addition, private student loan companies might allow interest to accrue while students have a loan deferred. Overall, private loans are less likely to have deferment plans compared to federal loans, but the best private loan companies will offer deferment options.

Some private loan companies use deferment and forbearance synonymously. However, forbearance always means the debt holder will pay interest on the postponed payments. Federal loans are one of the instances where there is a distinction between forbearance and deferment. For federal loans, interest will still accrue on the loan principal, and payments will be higher when a person resumes repayment. Forbearance is easier to qualify for, but it is a less desirable outcome than deferment on federal loans.

If a customer is behind on loan payments, the loan might default. The repayment terms of the loan will determine how long a debt holder can not pay before the loan defaults. Defaulted loans can be sent to a collection agency, and in some cases, loan companies can garnish wages to repay the loan. Defaulting on student loans can harm your credit score, prevent eligibility for other student loans, subject you to legal action, and cause you to lose up to 15 percent of your employee paycheck from loan repayment garnishing. This is clearly the worst case scenario for a student loan and should be avoided at all costs. Verify repayment terms with your lending company or companies and try other options, such as deferment, before choosing to default. If you find yourself struggling with additional debt or a defaulted loan, consider looking into debt relief services.