Today we have a great guest post from LendEDU’s Nate Matherson.
For many who have attended college using student loans, repayment of those loans has truly become a financial burden. There are a variety of financial programs available to help those with student loans. Two options available are private student loan refinancing and federal student loan consolidation.These programs differ, however, and knowing more about each before deciding which is best for you is important.
Private Student Loan Refinancing
With this option, student loans are refinanced through private lenders such as banks. In the past, this was not a popular choice because interest rates were high and repayment options were limited. Now, however, with interest rates much lower, many of those with student debt are considering private student loan consolidation and refinancing.
In order to qualify for private student loan refinance, the applicant must have a good credit history/credit score (600 or above), as well as be employed in a steady job. In most ways, to qualify for a private refinance, one would need to be able to qualify for any other type of consumer loan.
Because there is such a demand for student loan refinance, many private lenders are now making it easier to get these loans. They are also offering more repayment options as they are attempting to draw business from the federal programs. It is estimated that around 43 million people have outstanding student loans valued at an estimated $1.2 trillion. Of this amount, approximately $103 billion is in default.
Federal Student Loan Consolidation
Another option for those with student loans is federal student loan consolidation. Under this option, your student loans will bundled into one bill whose monthly payment is lower than the combined payments of the separate loans.
Repayment can, in some cases, be drawn out for up to 30 years. You can also change variable interest rate loans into a more manageable fixed interest rate. The downside to this, of course, is that it will take longer to pay off the loans, and, over time, you may pay an increased amount in interest. Still, the lower monthly payments may outweigh all of this. It is possible to consolidate to the same or a lower loan term, as well. In these cases, the interest rates are typically on par or lower than your current loans.
There are many federal student loans that can be consolidated:
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Subsidized Federal Stafford Loans
- Unsubsidized Federal Stafford Loans
- Direct PLUS Loans
- PLUS loans from the Federal Family Education Loan (FFEL) Program
- Supplemental Loans for Students (SLS)
- Federal Perkins Loans
- Federal Nursing Loans
- Health Education Assistance Loans
It should be noted that Congress may change the rules for consolidation soon. Many US lawmakers have recently introduced new legislation that may allow more students to refinance federal student loans at a reduced interest rate of 3.86 percent. A big change (if the bill is passed) would allow certain students who have private loans that are in good standing to refinance into the federal program so that they, too, can take advantage of lower interest rates.
Loans that are currently held by private lenders are not eligible for federal loan consolidation.
Note: As of September 2015, average interest rates for private student loan refinancing range from (fixed rate) 3.5 to 8.2 percent; (variable rate) 2.0 to 9.0 percent. Congress sets federal student loan interest rates; as of July 1, undergraduate loans are 4.29 percent and graduate and parent loans stand at 5.84 percent or 6.84 percent.
Nate is the founder of LendEDU. LendEDU is a marketplace for student loans.