But what if you see a deal offering 5% off a restaurant you’ve never heard of? Not as easy of a choice, right? At the very least, it’s risky. And even if the restaurant turns out to be okay, saving 5% isn’t much to get excited about.
Consolidating and refinancing student loans can be the same way. Sometimes the choice is relatively easy, especially when you stand to save a bunch of money. Other times, refinancing isn’t going to be a great deal based on the loans you have.
So, how do you decide on the best student loan refinancing options? Here’s a guide and some advice on choosing which student loans to refinance.
Private loans with higher interest rates
One of the best ways to consolidate student loans is to refinance your private loans that have high interest rates. The reason for this is twofold.
First, you can save money on the loans by refinancing to a lower interest rate. Your current student loans could very likely have a much higher rate than the refinancing rates available.
Second, you’re not likely to be changing much in terms of your repayment. Private student loans already have limited repayment options, so you don’t face the same conundrums you do with refinancing federal student loans (more on this below).
You may also want to consider refinancing variable-rate private student loans as fixed-rate private student loans. This depends on a lot of different factors, so it’s likely to make sense to consider your risk tolerance, as well as to run through some scenarios with people who know how to help. Our partners like SoFi can help you do this.
Loans with a cosigner
In some cases, having a cosigner on your loans might be the only way you can qualify for a private student loan. This can be very helpful in your academic career, and it’s noble for a friend or family member to help you out. But your cosigner might not want to be on the hook for your student loans forever.
Instead, refinancing might allow for what’s called a “cosigner release.” This means you can refinance your student loans without your cosigner’s name being attached to them. In case you’re unable to pay later, your current cosigner can take comfort in knowing that he or she is off the hook.
Refinancing will take care of cosigner release as part of the process as long as you’re able to qualify for a new student loan on your own. The old loan with a cosigner will simply be paid off and replaced with a new one.
Parent PLUS loans
Parent PLUS loans are often among the best student loans for consolidation and refinancing for several reasons.
First, they have the highest interest rates of all federal student loans. The rates for the 2014–15 school year are 7.21%. When new rates go into effect on July 1 for the 2015–16 school year, they’re expected to be even higher.
Second, parents who take out these loans may have a more stable financial picture. While refinancing isn’t always possible if you don’t have an established job and a reliable income source, it’s generally more likely for parents to have these. With this in mind, the favorability of refinancing student loans is higher.
And third, Parent PLUS loans lack other federal student loan repayment options. Since they’re not eligible for income-based repayment or Pay As You Earn, Parent PLUS loans don’t have as much repayment flexibility and as many options as other Direct Loans do.
It may soon be possible to refinance Parent PLUS loans in the child’s/student’s name. SoFi has plans to make this possible, though an exact date when this will become available has yet to be announced.
Unsubsidized Direct Loans
Refinancing Unsubsidized Direct Loans often makes the most sense when you have these loans from graduate school. Looking at the interest rate history of these loans, the rates can be fairly high.
If you borrowed money using Unsubsidized Direct Loans from 2006 to 2013, your interest rate is likely to be 6.8%. Since then, rates have dipped but increased again from a low of 5.41% in 2013–14.
No matter what your rates, you probably want to reduce interest rates by a few percentage points to make refinancing worthwhile. For example, if you can lower your student loan interest rates from 6.8% to 4%, this could provide worthwhile savings.
Loans you may want to think twice about refinancing
It’s not always easy to decide which student loans are best for consolidation. The following loan types and situations should be considered more carefully before you decide to refinance.
Some Federal Direct Loans
Federal loans that include both Direct Subsidized and Unsubsidized Undergraduate Loans are a tough call. The choice to refinance federal student loans really depends on the exact interest rate of your loans. These rates have fluctuated quite a bit, from a high of 6.8% from 2006 to 2013 to a low of 3.86% for the 2013–14 school year.
You may be looking at your rates and the rates you can get by refinancing and thinking, “even if I can save 0.2% interest on my loans, it’s worth it.” But not so fast—interest rates are really just the beginning of what you need to consider. Another big factor? Federal loan repayment terms.
Federal student loans have flexible repayment terms that often aren’t available with private student loans. This includes deferment and forbearance when you need to put payments on hold due to a hardship. It also includes repayment plans like income-based repayment that can reduce your monthly payment amounts.
Refinancing federal student loans always comes with this trade-off. Because of this, you want the reward from refinancing your loans to be well worth it when you’re giving up some of the plus sides of federal student loans.
Loans slated for forgiveness
Another factor to consider when you’re thinking about refinancing your student loans is whether or not they’re eligible for forgiveness. This can be possible through various programs like teacher student loan forgiveness, public service loan forgiveness, or Income-Based Repayment.
While you may want to consider student loan forgiveness, you still need to factor in how much money you’ll save (or how much more it’ll cost). Some who are seeking forgiveness for their student loans down the road are surprised to find they will have repaid their loans before any debt is forgiven. This is, again, why you need to check and see if forgiveness or other repayment options like consolidating and refinancing result in the biggest savings over the full term of the loan.
The bottom line? Everyone’s situation is different. You’ll want to talk to someone in the know about your case or apply for a loan to see how much you can save. In any case, make sure the savings are significant, especially if you’re consolidating federal student loans into a new private loan.
