If you had pursued higher education, chances are you are still dragging some student debt on your name. While you might have got those loans at a rate that reflected your then credit history, you might want to take advantage of the years you were a decent borrower. Refinancing or consolidation can decrease your interest rate.
The best way to do this is to refinance your loan at a rate dictated by your current credit score, which is presumably better than the one you had when you first signed up for the loan.
Know the difference
First, make sure you understand what you are signing up for since there are two different ways of merging existing loans into a new one. The first one is consolidation, where you just roll all your debt into a new loan covering the old ones. The role of this action is to have a single payment and keep track of finances better. The interest stays the same.
The second option is refinancing. This means that you will take out a brand-new loan, with entirely different terms reflecting your current situation. The scope of this action is to pay less by getting a better interest rate. Most student loan consolidation companies offer both alternatives.
Should I refinance?
Unfortunately, there is no right answer to this question, it all depends on your particular situation.
For example, assess if you are switching from a fixed rate to a variable one. That means that you are taking on the risk of having a more substantial payment in the future. Is the difference between your current and future APR worth this? Has your credit score gone up so high in the last years that you can hope to get a significantly lower interest rate?
What is your profession? Do you work in public service or as a teacher? You might have to think about twice before refinancing. First, you should check if you are eligible for a forgiveness program if you have federal loans. These are usually granted after 10 years in the same job.
If you decide to go ahead with the refinancing, ask your lender if the refinanced loan still qualifies as a student loan. This information will be helpful during your tax preparation. While student loans are deductible, most refinanced loans lose this status.
Refinancing feels like a fresh start and can improve your relationship with your finances. This is because most people can get a lower APR. Also, it saves you the trouble of having multiple payment deadlines. Keeping track of payments and being always on time with installments is a way of taking care of your credit score. Any missed deadline can translate into a delinquent payment which stays on record for seven years.
This approach can also ease your immediate financial burden. If you want to pay less on a monthly basis and you are ready to take responsibility for a longer time span, this could be the right choice for you.
When refinancing you could get the lender to allow you to get a cosigner to secure your loan and get a better rate, or release your parents from the cosigner position if you can afford the whole loan yourself.
Although the lower interest might sound tempting, take your time and do the math. Add all commissions including loan origination, file assessment and other monthly fees for the entire period of the new loan. Compare what you had to pay initially for this amount and decide if you want to go through all that trouble.
While you can refinance as many times as you want, you can only consolidate once. The problem here is that the interest can drop below the rate you get when you combine.
Never consolidate in the last few months of the loans since you will only be taking more interest. Since the bank first covers its