When Refinancing Student Debt Makes Sense

RefinanceAccording to the website “The Student Debt Project”, the average American student graduates from college with $29,400 in student loan debt. This number is even higher for students who attended private and private for-profit universities.

This number also assumes that the “average” student graduates from college in four years, did not switch majors, or pursue a specialization or higher-level degree.

Around 90% of student loans are granted by the federal government. The remaining 10% are made by private lenders such as banks and credit unions. Many students see private loans as a last resort – as necessary only when they have maxed out their federal loans.

Private companies generally charge much higher interest rates and fees, making the debt owed much more difficult to pay down. According to the Consumer Financial Protection Bureau, in 2012, around 850,000 private student loans (totaling more than $8 billion owed) were in default.

Weigh Your Options

Some consolidation companies attempt to make it look like refinancing or consolidating your student loans is the only thing that can save you from a lifetime of poverty. It’s important to note that this is not necessarily true.

Refinancing can be a godsend for some, but it’s not wise to think that the company you’re working with is your savior. They are out to make money; helping you out is not why they’re in this. So, before you decide to take this step, it’s best to do some thorough research on what kind of companies are out there.

Graduates generally choose to consolidate their loans for one (or both) of two reasons:

  1. Refinancing can save you thousands of dollars per year due to a lowered interest rate.
  2. Instead of making multiple payments to multiple lenders per month, you’re only responsible for one payment to one lender every month.

If you can identify with one of these reasons, you should definitely look into consolidating your loans. Don’t just jump into doing so, though; it will take some time for you to find a deal that’s worthwhile.

Consider if You’re Qualified

Some graduates shy away from student loan refinancing or consolidation because of the credit score and minimum income requirements. Qualifying for private student debt consolidation isn’t as difficult as it used to be, though. As Stephen Dash, founder and CEO of Credible.com, states “lenders are moving down the credit scale.”

Generally you must have a credit score above 650 to qualify for consolidation, but this trend seems to be changing as more students enter into the debt consolidation marketplace. So, before you apply for refinancing, ask yourself these questions:

  • Is my credit score better now than it was when I applied for my initial loans?
    Most financial institutions are looking for a “good” (above 720), or at the very least, “fair” (above 600) credit score in order to qualify for refinancing.
  • Do I have a stable monthly income?
    Most financial institutions will require that you make at least $2000/month in order to consolidate. If you’re stuck waiting tables or doing freelance work for now, you might consider finding yourself a cosigner.
  • What is my debt-to-income ratio?
    Generally, you will not be eligible for consolidation if the amount of debt you owe exceeds 45% of your monthly income. Again, keep that cosigner option in mind.

If you’re enrolled in a graduate program or internship, these qualifications listed above may not apply to you in full. The fact that you’re investing in your future by continuing on in your studies is generally something financial institutions will take into consideration when you apply for consolidation.

Sounds Good, Now How do I Start?

The first step is to make a spreadsheet or document that contains all of your lenders, monthly payments, amount owed, and any other relevant information. You might be receiving student loan bills from multiple different lenders.

Taking into account all of the other bills you have to worry about, it’s difficult to keep track of what you owe to whom and when. If you don’t know all of this information offhand, check your credit report – it should have all of your lenders listed.

Once you have a handle on what you owe and to whom, you’ll need to hit the phones. As you probably know, there are tons of student loan consolidation scams out there. A basic rule of thumb is: if it looks too good to be true, it probably is. So, the best place to start is with the lenders you already have.

There are also tons of websites out there nowadays who will compare rates from multiple lenders to find you the lowest advertised refinance/consolidation rate available. They do so by searching through thousands of banks and credit unions’ advertisements.

The key thing to notice here is that they’re searching through advertised rates. Not all consolidation companies will advertise their absolute lowest rates. Sometimes you’ll need to pick up the phone and talk to a real person in order to get the best rate. This is why it’s best not to rely solely on websites like this.

Certainly use them as a springboard to begin your search, but make sure you’re taking the time to go to individual lenders’ sites as well. They should have their most current statistics and interest rates listed there.

When you evaluate your options, be sure to consider three things: whether the interest rate is fixed or variable, whether there are prepayment penalties, and whether there are any upfront or long-term fees.

You should know that refinancing your debts affects your credit ratings in the same way that opening up a new credit card or car loan would. The hard inquiry will knock your score down a few points initially. Student loans are seen as “good debt”, though – meaning that if you make your monthly payments on time your credit score will only increase in the long run.

In short, you’re much better off taking the initial hit that refinancing brings than being late on your monthly payments, or even worse, defaulting.

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