If you have multiple private student loans, you’ve probably considered consolidating and refinancing those loans into a new, single loan. For many people, especially those with more than two or three student loans, this is a smart option.
Your multiple loans (private and/or federal) are consolidated into one a single, making you responsible for just one payment per month.
Consolidation also makes it easier for you to budget your monthly expenses – extending the life of your loan and making you responsible for just one, lower monthly payment.
Most consolidation lenders will also not penalize you if you decide to pay off your debt early. Finally, consolidation loan interest is considered tax deductible, so you’ll save some money on your federal income taxes.
How Will My Interest Rate be Calculated?
Interest rates for student debt consolidation are determined primarily by your credit score. Credit Karma is one of the best places to get your credit score completely free.
The good news is that when you apply for consolidation, the interest rate you receive is oftentimes lower than that of your original private loans. This is mostly because peoples’ credit scores tend to improve as they age (and make more sound financial decisions).
If you choose to have a cosigner, the cosigner’s credit history will also be considered.
When you fill out the forms to refinance, you’ll be able to choose between two types of interest rates: fixed and variable. A fixed rate stays the same throughout the life of your loan, while a variable rate will change with market trends.
For the latter option, you’re taking a bit of a gamble, so be sure to leave a little extra in your budget for fluctuating rates.
You’ll generally be able to choose to extend your loans (now one single loan) into a 5, 10, 15, or 20 year repayment term. Interest rates are the lowest for the shortest amount of time; a 5-year loan will have a substantially lower interest rate than a 20-year loan.
Where to Start
Organization is key – make yourself an Excel spreadsheet or Word document. You should include the lender name, consolidation interest rate, length of payoff term, and whether or not there are special fees. Now hit the phones!
The best place to start is with your original lenders. Go down your list of private loans and call each of these organizations. Tell them you’re shopping around for consolidation rates and ask them what they have to offer.
Be sure to have a handle on the interest rates you’re currently being charged, so you can use those to compare to the number they give you. Make sure it’s a fixed (and not variable) rate!
Enter these numbers into your document so you can keep track of everything. As you call other lenders, make sure to tell them the lowest interest rate you’ve been quoted to see if they can beat it.
Now Let’s Make It Super Easy: 10 Questions to Ask Consolidation Lenders
- What are the usual credit score, debt-to-income ratio, and salary requirements for consolidation through your institution?
Most banks require at least a 650 credit score to refinance, and a monthly salary of $2,000 or more, depending on your indebtedness.
- What are the lengths of the repayment terms you offer?
Generally this will be 5, 10, 15, or 20 years. You should be focused on the amount of money you’re making now, not the huge salary you plan on earning in the future. Expect the best, plan for the worst.
- Do I have a choice between a variable interest rate and a fixed interest rate?
As we mentioned above, fixed interest rates are far less risky. If the economy is bad, interest rates are low, and vice versa. Keep in mind that since the 2008 recession, our economy has been on the upturn.
- When does repayment start and what are the repayment terms?
Ask for your monthly payment amount and options they have for paying this bill. Also ask if there are interest rate reductions for automatic payments.
- Do you charge an origination fee?
Some banks will charge you a small fee (1-2%) for the total amount you’re requesting to consolidate.
- Do you charge any fees if I decide to pay the loan off early?
Very important to ask!
- Do you allow for cosigners? Do your require a cosigner?
If your income or credit score is too low, the institution might require you to have a cosigner. On the other hand, if they don’t require it, it is still worth some consideration as a means to lower your interest rate.
- What is the maximum amount of debt you will refinance?
This amount varies widely by financial institution. This can also depend on whether or not you attended graduate school or did an internship.
- Does the university I attended qualify for consolidation?
Some places won’t refinance if you attended a for-profit university or a community college.
- Can you give me some information on your customer service standards?
You’re going to be stuck with this financial institution for the next five to twenty years – make sure they’re going to take care of you!
So what are you waiting for? Get on the phone and start doing your research! Even if you decide student debt consolidation isn’t for you, you’ll feel content knowing that the rates you have on your current loans are the best for your budget.
Student loan debt can be a thorn in your side for decades, so be sure to consider your options carefully. The lender with the lowest monthly payment may not always be the best deal, so be sure you’ve asked all the questions above to find the best choice.