When is the best time to consolidate or refinance my private student loans?

Facebook-Images13Written by: Jim Holt of Student Choice

If you’re one of many recent college graduates, first congratulations on finishing up your degree! You may already be in the work force and wishing you could go back in time. Back when things were simple, food was plentiful, and overindulgence was widely accepted. Well, you’re not there anymore (darn it) but you’re also not alone. We get asked all the time about loan consolidation because many recent graduates are in need of a solution to ease their financial burden. The good news is that there are solutions and resources available to help you do just that. Private loan consolidation may be exactly what you need but how do you know? Here are a few questions to ask before you start the process:

  1. Do I have just way too much in private student loan debt? 
    Here is a good rule of thumb. Ask yourself, “Is my annual salary less than all of my student loan debt – including both private and federal student loans (e.g. Stafford and Perkins)?” If your answer is yes, then you’re probably already feeling the pinch month to month. I know what you’re thinking – “Now you tell me this rule.” The good news is consolidating both your federal and private loans will likely be just what you need. There are two types – one for private loans and one for federal. The key is to avoid being late on any of your payments. One of the most important things you can do in building a strong financial future is to pay on time. This creates healthy credit that you need and many employers are reviewing during the hiring process. It’s in your best interest, today and for tomorrow, to make payments on time. And, if consolidation allows that to happen, it’s a good idea.
  2. Am I paying too much interest on existing private student loans? 
    If the stated interest rate on your loans is more than 4% over the existing Prime Rate (check out the latest rate on bankrate.com), you should consider lowering the rate through consolidation. This is one of the fundamental reasons to consolidate – getting out from underneath high interest rates. Allow me to challenge you before starting the application process, however. Try to keep your repayment term the same OR better yet, reduce it. If you are able to make the payments today, avoid the lure of lowering the payments through consolidating your 15-year loans into a 20-year consolidation loan with a lower rate. Yes, I know, you may be able to afford a nicer car with the monthly savings.  But, don’t do it…be strong! Instead, select a consolidation loan with the same 15-year term or even less. The reduction of interest, in many cases, will absorb the difference keeping your payments the same. Okay – I know this doesn’t sound exciting.  But, you will end up saving literally thousands of dollars. Take the example of $50,000 in loans at an interest rate of 8.5% over 20 years. The payment is $433 and after the 20 years, you would have paid the lender over $54,000 in interest. Now take the example of consolidating these same loans into a lower rate of 6% and shortening the term down to 15 years. Your payments will be relatively the same but you would save $28,000 in interest. That’s a car by itself! Okay, maybe not the flashy new BMW that your friend is driving, but it’s safe to bet, they’re not getting themselves out of debt as quick as you!
  3. How many years are remaining before my private loans are paid?
    Lenders make their money on the interest you pay. The longer you pay, the more interest they make as seen in the example above. If you can leverage a consolidation loan to bring down the interest rate without increasing the length of time on the loan, go for it. However, if you only have a few years remaining and the interest rate isn’t crazy high, then it may be best to stay the course rather than consolidate.
  4. Do I love my co-signer? 
    Whoever was kind enough to cosign on your undergraduate or graduate private student loans, would likely welcome having that loan removed from their credit report as a debt obligation. Why is this important to you? Maybe they got you something nice for graduation or will purchase something for their retirement that you will love as an inheritance. Or maybe, on a more serious note, it’s just a kind way of repaying your debt and allows them to be off the hook and keep their credit in great shape as well.

Now that you’ve asked yourself some important questions, if you’ve determined that consolidating your private student loans is the right thing to do you likely have one more question, “How do I choose the best product?” Simple. It’s the loan that allows you to do the very things addressed above at the best rate, best service, and with the easiest process. Don’t worry; we’ll be posting more on that topic soon!

If you’re ready to consolidate your loans, we can help you find a credit union lender. Check out the CUSelect Tool to find a credit union in your area!

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