Tag Archive for: Consolidation

If you have student loan debt, you have most likely heard the terms “student loan consolidation” and “student loan refinancing”. Although they sound similar and are often used interchangeably, they are actually two different programs. Therefore, understanding these programs and their key differences can help you make better student loan repayment decisions.

Student Loan Consolidation

Student loan consolidation lets you combine one or more eligible federal student loans into one new Direct Consolidation Loan. As a result, the U.S. Department of Education becomes the new lender. As the administrator of the program, they use companies such as Nelnet to originate and service the loans.

Student Loan Refinancing

Student loan refinancing is offered by private (non-federal) lenders to allow student loan borrowers to refinance one or more federal and/or private student loans into a new private student loan. Consequently, the lender of the new private student loan will be a bank, credit union, or other financial institution. Either the lender themselves or entities like Firstmark Services, a division of Nelnet, handles origination and servicing.

Which is Better?

Both programs offer many benefits. These benefits include simplifying your monthly student loan payments, locking in a fixed interest rate, and lowering your monthly payments. However, there may be some drawbacks as well. For example, if you extend your repayment term, you could increase the total cost of your loans. Therefore, you may forfeit current and potential future federal student loan benefits. Also, any incentives attached to your current loans, such as interest rate reductions for automatic payments, are lost.

Comparing Options

The table below provides a side-by-side comparison of several important features of student loan consolidation and student loan refinancing.

Student Loan ConsolidationStudent Loan Refinancing*
LenderU.S. Department of EducationBanks, Credit Unions, and Financial Institutions
Credit Check RequiredNoYes
Upfront FeesNoneMost lenders do not charge any upfront fees
Interest Rate TypeFixedFixed and variable rate options are offered by most lenders
Interest RateWeighted average interest rate of the loans being consolidated, rounded up to nearest one-eighth of 1%Varies. Factors may include the borrower’s and/or cosigner’s credit history; repayment term; interest rate type; highest level of education; and current market conditions
Repayment PlansStandard, Graduated, Extended, and various Income-Driven Repayment plansStandard Repayment
Repayment Term10 to 30 years depending on the amount being consolidated5 to 20 years
Allowable LoansMost federal student loans are eligible. Private loans are not eligibleFederal and private student loans are allowed by most lenders
Interest Rate ReductionRate reduction for automatic paymentsRate reduction for automatic payments. Some lenders offer an additional rate reduction to existing customers with a qualifying account
Ability to consolidate or refinance multiple timesGenerally no, unless additional federal loans are includedYes
Loss of Federal BenefitsSome benefits may be lostYes, including potentially qualifying for Public Service Loan Forgiveness on federal loans
When can you consolidate or refinanceAfter graduation, leaving school, or dropping below half-time enrollmentAfter graduation, leaving school, or dropping below half-time enrollment. Some lenders allow refinancing while in school

* Features represent those of the largest and/or most common private student loan refinancing programs. A specific lender’s features may differ, so be sure to read the program details carefully.

Choose the Right Option for You

While there are similarities between student loan consolidation and student loan refinancing, they are different programs with unique features. Firstly, if you are interested in consolidating or refinancing your current student loans,determine what you want to accomplish. Your goal may be to lower your monthly payments, lock in a low fixed interest rate, and/or lower your overall cost of repaying your loans. Next, compare the federal government’s Direct Consolidation Loan program to U-fi and other private lender programs once your goal has been set. Then, decide if consolidation or refinancing is right for you based on your financial goals and circumstances.

Want to reduce your monthly payments? Learn how to make it happen with U-fi.

With the numerous private student loan repayment options available, selecting the right one can seem a bit overwhelming. However, with a little bit of knowledge, you can make a more educated decision. In Part I of this article, we covered repayment plan options. Now, we’ll review interest rate types and repayment terms to find the best student loan option for you.

Interest Rate Type

Borrowers taking out private student loans or refinancing their current student loans have a few interest rate options.

  • Variable: Variable rate loans have an interest rate that can fluctuate over time as the rate index, such as the Prime Rate or LIBOR, goes up or down. Variable rate loans typically come with lower starting interest rates than comparable fixed rate loans. However, they come with greater risk, since rates may rise in the future. Most variable rate loans have a cap that places a limit on how high the rate can rise.
  • Fixed: With a fixed rate loan, once the rate is set, it does not change for the entire repayment period. Fixed rate loans normally have higher starting rates than variable rate loans. This is because the lender takes on the risk of interest rates fluctuating over time.
  • Hybrid: Another less popular option is a hybrid rate loan. With a hybrid rate loan, the interest rate is usually fixed for a period of time. It then switches to a variable rate for the remainder of the loan period.

Tip: If you intend to pay off your loans in a short period of time, consider a variable rate loan. If you plan to take longer to pay off your loans or prefer stable, predictable payments, a fixed-rate loan may be the best choice. When deciding which type of rate to choose, use the lender’s loan repayment calculator to estimate the savings between a variable rate and a fixed rate loan. Also decide whether the estimated savings is worth the additional risk of a variable rate loan.

Repayment Term

Another important item that determines the interest rate you will be charged is the repayment term you select. Most lenders offer private student loans and refinance loans with repayment terms between 5 and 15 years. Some lenders offer repayment terms as long as 20 years.

When determining interest rates on private student loans, remember that the shorter the repayment term, the lower the interest rate. This is because the lender takes on additional risk by allowing you to repay your loan over a longer term.

Tip: Your monthly payment amount is determined by several factors. These include the principal balance of the loan when you start making payments, the interest rate, and the repayment term. Shorter repayment terms come with lower interest rates, but higher monthly payments. Choose a repayment term with a monthly payment you can afford, especially when you are first starting out.

Choosing Your Best Option

Choosing the repayment option that best fits your current and future needs can be a bit tricky. But, with a little planning and thought, you can zero in on the loan terms that are best for you. If you find your financial situation changes down the road, and your current repayment terms no longer meet your needs, you may be able to work with your lender to modify your repayment terms. If that isn’t an option, then you can look at refinancing your student loans and replace them with a new loan that is a better fit.

Tip: Most private student loans do not have any pre-payment penalties or fees. If down the road you can afford to pay more than the minimum each month, you can pay down your loan faster without being charged any pre-payment fees. This reduces your overall cost of borrowing in the end.

Understanding the nuances of private student loans can make a big difference when deciding which one is right for you. Making the right choices when taking out student loans can have a strong impact on positioning yourself for a bright financial future.

When it comes to student loans, you’ve likely heard the terms consolidation or refinance. You may have thought they mean the same thing. While they’re similar, they are actually two different options for combining your student loans.

Student Loan Consolidation

Direct Loan consolidation is a program offered by the Federal government. This program allows you to combine all of your federal student loans into a single loan. The interest rate for your consolidation loan is a weighted average of all the loans you are consolidating. It is not based on credit, like student loan refinancing. You can also switch your variable interest rate loans to fixed interest rates to avoid paying more interest if variable rates rise. Typically, student loan consolidation doesn’t save you money, but it simplifies your payments into a single monthly payment. You also get to keep your federal student loan benefits, such as income-driven repayment plans and loan forgiveness.

Student Loan Refinancing

Student loan refinancing is a program offered by private lenders. This program combines your federal and private student loans into a new loan with a new term and interest rate. The interest rate of the loan is based on creditworthiness, unlike student loan consolidation. With student loan refinancing, you can pick a term that fits your financial needs and may save you money. However, extending the term of any loan to lower monthly payments means paying more interest in the end. Many lenders offer borrower benefits with student loan refinancing, such as interest rate reductions for auto-debit payments and cosigner release. Keep in mind, if you refinance federal student loans, you no longer have the federal benefits associated with those loans. Find out if student loan refinancing is for you by asking yourself these 6 questions.

Student loan consolidation or refinance can simplify your student loans into one monthly payment. Just remember there are additional unique benefits to both options. Weigh the benefits of each program to decide the right option for your situation. As with any loan, make sure you fully understand all the terms and conditions.

You’ve made your decision. You are going to refinance your student loans. You have done the research. You’ve compared a number of student loan refinance programs. You have completed side-by-side calculations. You know which ones have the lowest interest rates, best repayment options, and the most generous borrower benefit programs. You’ve read the fine print and narrowed your choices down to your top three. But do you know your loan servicer?

Making the Choice

So which one is it going to be? Is it the lender who lists the lowest interest rate? Or perhaps the lender with the repayment plan that allows you to lower your monthly payment the most? How about the lender that offers those tantalizing borrower benefits? The ones that allow you to save hundreds of dollars more when you refinance with them?

Choosing which student loan lender to refinance with can be a difficult decision. While you should definitely consider the overall cost, monthly payment, and borrower benefits offered, there is another very important factor. You need to know who the lender and loan servicer will be after making your new refinance loan; the one you will start making your new monthly payments to.

Who are Loan Servicers?

You may be wondering why this is important. Once you refinance your student loans, many lenders have agreements to sell, or package their loans into financial securities. Thes often go to the highest bidder. The proceeds from the sale then make more refinance loans, which the lender subsequently sells. This happens over and over again. Rinse and repeat.

Lenders Decide

Ok, so the lender sells their loans, but the loan servicer the lender contracts with to manage your account and accept payments has a good reputation, which means you’re good to go, right? Maybe. That’s because the holder of your student loans (either the original lender or the buyer if the loans are sold) gets to decide where the loans are serviced. And once your refinance loan is made, the loan servicer is most important to you, since this is who you will be interacting with. It’s similar to when you buy a TV from a large retailer. The retailer sets the price and sells you the TV, but once you own it, you must contact the manufacturer with any questions or if you need customer support.

Tip: The lender and loan servicer information can usually be found on the lender’s website, in the Application and Solicitation Disclosure every lender is required to present you before you apply for a loan, or on the actual promissory note you must sign. If you don’t recognize the lender or loan servicer, you should call the financial aid office at your school to ask them if they are a reputable organization.

What if the lender doesn’t sell their loans, or package them into financial securities. Everything is fine then, right? If the lender doesn’t sell their loans, or sells them to a buyer that uses the same loan servicer, then you can feel pretty good about things. While there are no guarantees, if the lender uses a reputable loan servicer, then you can feel fairly confident your customer satisfaction is very important to them. The chances that they would jeopardize this by cutting corners with a low-cost, low-quality servicer just to save a few dollars is less likely.

Know Your Lender and Servicer

Knowing who the holder and loan servicer of refinanced student loans are after the loan is made is extremely important. If the lender sells their loans, be sure you know who the buyer is and which loan servicer they use. If you’ve ever had to deal with a company that provides poor customer service, chances are you wouldn’t buy from them again if you didn’t have to. With student loan refinancing it’s even more important, because if you’re unhappy with your loan servicer, the only way to switch is to refinance your loans again.

Undergraduate students graduate with an average of $30,000 in student loan debt. This amount can feel overwhelming. However, there are several tips for saving money on student loans. You can do it while you are in school and after you graduate.

Saving Money on Student Loans Step 1: Only Borrow What You Need

The first step is to only borrow what you need to cover your college costs. Many students over-borrow and end up with more student loan debt than they are able to pay back after graduation. Grants and scholarships usually don’t have to be paid back as long as you continue to meet their requirements. However, these forms of financial aid generally won’t cover all of your college costs. Looking at your federal loan options is your next step. Federal loans will have to be paid back with interest. However, they usually offer borrowers lower interest rates and more flexible terms. Make sure you take advantage of these options before considering a private student loan. Private student loans are a great option when you’ve exhausted all federal aid options and still have college expenses. As with any loan, make sure you understand the terms and conditions.

Saving Money on Student Loans Step 2: Make In-School Payments

The second way to save money on your student loans is to make payments while in school. Most loans will give you a deferred payment option. This means you don’t have to make any payments on your student loans while you’re in school or during your grace period. While it sounds like a good option, interest accrues on your loans during this time. That could mean a larger bill at repayment. If you budget to make full principal and interest payments while still in school, you’ll save the most money over the life of the loan, but that isn’t always feasible for everyone. Another great way to save money is to make interest-only payments while in school. This monthly payment will be much less than a full principal and interest payment, but will set you up for success when you get to repayment.

Entering Repayment

Once you graduate your loans will go into repayment following your grace period. That means you will start making payments toward your full principal and interest payments until the loans are paid off. Federal loans have several repayment options to fit your budget, but keep in mind the lower your payment and the longer your loan term the more interest you will pay over the life of the loan. Make sure you are aware of and take advantage of any borrower benefits your loan servicer offers, such as a lowered interest rate for auto-debit payments.

Refinancing or consolidating your student loans may also be a good option for you.

These are a few of the main ways to save yourself money on your student loans while you’re in school and after you graduate. Knowing your options and paying what you can along the way will set you up for a successful future, free from student loans.

Recent surveys and studies suggest that many young adults lack basic money management skills. Too often, students enter college at a loss for managing their personal finances. College may be the first opportunity you have to experience some independence, and may be the first time you are faced with budgeting and making financial decisions on your own.

One of the simplest, yet most important steps to controlling your finances is budgeting. To start the process, determine your take home income and total expenses. Then break it down to a simple formula:

Income – Expenses = Positive or Negative Outcome

As you can probably guess, you want to end up with a positive outcome. To accomplish this, you need to spend less than you earn. It may sound easy, but it can be difficult. In order to calculate this number, you’ll want to sit down with a list of your monthly expenses. Worksheets like this one can help ensure that you’re accounting for everything – even that daily latte.

Here are some steps to get you on track to creating a budget and taking control of your financial future.

Know your income sources.

This is usually pretty straight forward. It’s typically money you earn from a job, but if you’re a student it can also be money you’re receiving from financial aid sources (grants, scholarships, or loans), money from your parents or other family members. To ensure your funds last the entire semester, you may need to average out your financial aid to a monthly amount.

Identify your expenses by using a daily spending diary.

Fixed monthly expenses like rent, car payments, insurance, and any other expenses you pay every month are easy to identify. The daily spending diary can help you track your variable expenses like food, entertainment, and clothing. After tracking of all of your expenses for a month, you may be surprised at where your money is going.

Figure out needs vs. wants.

When looking at your expenses or potential purchases, it’s important to make a distinction between “needs” and “wants.” There are some things you absolutely need – like housing and food. However, some things may fall into the “wants” category, like frequently eating out.

Find room for improvement.

After you’ve identified all of your expenses, find areas that can be reduced or even eliminated. Remember, you want to spend less than you earn. That goes for credit cards, too. It’s easy to spend what feels like “free money” but that debt can catch up with you quickly with interest.

Stick to it.

The last step, and possibly the most difficult, is to stick to your budget and resist the temptation of unnecessary spending.

After you’ve crafted your budget, stick to it each month, then evaluate how you’re doing. Are you staying within your budget? Are there problem areas you need to address with some of your expenses? You can find more money saving tips here to keep your expenses under control.

After you’ve created your budget, you’ll start to experience the benefits.

  • Ensure you don’t spend money you don’t have
    • Far too many of us spend money we don’t have using credit cards or student loans. A good tip is to only use credit cards when you can pay the balance each month and only use student loans for what you need (not want).
  • Shed light on bad spending habits
    • Building a budget forces you to look at your spending habits. You may find areas where you are spending money on things you don’t really need.
  • Leads to a brighter future
    • Budgeting allows you to position yourself for a more successful future. It’s far easier to “live like a student” when you’re actually a college student as opposed to trying to climb out from under a mountain of debt later.

Budgeting doesn’t mean spending as little money as possible or feeling guilty about every purchase. It’s about knowing your limits and making sure you have control of your finances.

When you’ve recently entered the workforce, balancing repaying student loans and a budget can be a challenge. This is especially true if you have a standard entry-level salary. As the cost of higher education continues to rise, it becomes increasingly difficult to manage high monthly loan payments. You also need to worry about everyday expenses like rent, car payments, utilities, and groceries. At times, it feels like you have to make a choice between repaying student loans and living your life.

No matter what some newspaper columnists might lead you to believe, defaulting on your loans is never a good idea. Instead, tap into that survival instinct you developed in the classroom. Get serious about repaying those student loans – the smart way. Here are five ways to manage your loan payments as a young professional.

Stay in contact with your loan servicers.

There are generally two categories of student loans: federal and private. Regardless of the category, student loan servicers handles billing, payments, customer inquiries, and other administrative services for your loan. Servicers help you navigate loan repayment systems, find the right repayment plan, and answer your student loan questions. If you don’t know who services your federal loans, you can find out at nslds.ed.gov. This site lists all of your federal loans, along with the contact information for your servicer. To obtain contact information for your private loan servicer, review your lender’s website or call their toll-free number.

Know which questions to ask.

The questions you should ask depend on your loan type. For federal loans, ask if you’re on the right payment schedule for your financial situation. There are a variety of repayment options available. Your servicer uses information about your job, income, and federal loan amount borrowed to help you find the repayment plan that’s best for you. Options include payments based on your current income, or payments that increase periodically over the life of your loan. Whichever option you choose, remember to keep a long-term view when making decisions about repayment schedules. Consider the interest implications of any option. Private loans are different. You selected repayment terms at the time of application. Information about your private loan rates, terms, and repayment can be obtained from your private loan servicer. They can also offer information and support throughout the life of your loan.

Consider consolidation.

Depending on what type of loan(s) you have, consolidation may help you save money. If you have one or more federal loans, a federal consolidation loan can combine your loans into a new loan with a blended interest rate. It may also extend your repayment period. When you talk with your servicers, you may want to discuss this option. You can find more information about consolidation and federal loan repayment at the Federal Student Aid website.

Private student loan refinancing allows you to replace your existing private and/or federal student loans with a new private student loan under different terms. If you are repaying multiple student loans, want to lower your monthly payment, or if your interest rates are higher than you would like, you may want to consider private loan refinancing. Private student loans require a credit check, and you can often get a lower interest rate with a cosigner. Most lenders provide loans with no application or origination fees. You may also prepay your loan at any time without penalty. You will have the opportunity to see your rates and terms before finalizing your loan.

Do your research.

If you have student loans with high interest rates, refinancing with a private loan can be a great option. They may allow you to save money over the life of your loans with a lower interest rate. But private loan refinancing isn’t right for everyone. For instance, if you have federal loans that carry special repayment benefits or forgiveness programs, it might be best to explore federal loan consolidation. There are unique benefits to both, so be sure to do your research.

Stay current on your monthly student loan payments.

The consequences of defaulting on education loans are very serious. If you’re not able to make your payments, contact your student loan servicer before becoming delinquent. They have trained representatives who can help you find the best solution for your needs. If you lose your job or experience other difficulties, you may be eligible for deferments or forbearances. These mean you may stop making payments for a period of time.

When it comes to repaying student loans, there are many ways to build a healthy financial future. Staying in touch with your servicer and being aware of the options available to you are some of the best ways to make smart financial decisions.

Should I consolidate or refinance my student loans? At U‑fi Student Loans, we get this question daily and it’s one every person with student loan debt should ask themselves. Of course, the answer depends on your specific situation and is not always clear cut. In many cases it makes total sense, while in others it may not, or at least not right now.

Before thinking through the different options available, you should understand the difference between consolidate and refinance.

Consolidating your student loans through the federal government’s Direct Consolidation Loan program means combining several loans into one new loan. The new interest rate is the weighted average of the interest rates from the loans you are consolidating. With refinancing, you are actually paying off your federal and/or private student loans with a new private loan. This new loan has a different interest rate and loan terms.

Now that you understand the basic difference between consolidation and refinancing, here are some things you should carefully consider:

1. Do you want to save money by lowering your overall costs?

Many people know loans with a lower interest rates generally cost less than loans with higher interest rates. But many don’t realize students who borrowed between 2006 and 2013 could substantially lower the interest rate on those loans. They may be eligible if they have good credit and refinance their loans during today’s historically low interest rate environment. Even if you’re comfortably making payments, lowering your interest rates can save on your total loan costs.

2. Are you making multiple monthly payments?

Are you making more than one monthly payment and want to simplify your life? Loan consolidation or refinancing can help. However, if you have federal and private student loans and want only one monthly payment, your only option is refinancing. You cannot consolidate private loans through the Direct Consolidation Loan program.

3. Do you want to switch your interest rate from a variable to a fixed rate (or vice versa)?

When you took out your student loans, each loan had either a fixed or variable interest rate. Understanding what type of interest rates you have is important. It affects whether or not your monthly loan payments will fluctuate over time. If you have fixed rate loans your monthly payments will remain constant. With variable rate loans your monthly payments may change over time.

Do you plan to pay off your loans in a short period of time? A variable rate loan could be a good option. The initial interest rate on a variable rate loan is typically less than on a fixed rate loan. However, the longer the repayment term, the greater the opportunity for variable interest rates to fluctuate. If rates rise, your monthly payment and total costs will rise as well.

4. Do you want to lock in a fixed monthly payment with a low interest rate?

If you prefer predictable payments that won’t change over time, then a fixed rate loan may be your best choice. With the current low interest rate environment, you could lock in a low fixed interest rate by refinancing. Your rate depends on several factors. These factors include your credit, income, education level, repayment term, and whether or not you have a cosigner.

5. Are your monthly payments weighing you down?

Are you having trouble making your monthly student loan payments? Do you just want to free up some extra cash? Refinancing your loans can be a great option. Most private loan lenders offer repayment terms up to 20 years, with some like U‑fi offering a 25-year option. By increasing the length of your repayment period, you can lower your monthly payments. However, loans with longer repayment terms typically have higher interest rates than loans with shorter terms. You will likely end up paying more in total interest over the life of the loan.

6. Will you lose any features or benefits if you refinance or consolidate your loans?

Refinancing or consolidation means you are replacing your loans with a new loan. It’s important to understand you might lose benefits tied to your original loans. For example, federal loans offer a variety of deferment, forbearance, and repayment options. These benefits assist borrowers who cannot afford their monthly payments. Federal loans also offer benefits to military service members that may not be available with private loans. Your current loans may also have borrower benefits such as an interest rate discount. Be sure to compare the features and benefits of your new loan with any you might be giving up.

If the time is right to refinance your student loans, take a moment to review several lender websites. Create a short list of top candidates. Call each candidate and ask them any questions you have, including what you will need to apply. Make sure you are speaking to the actual loan servicer. This is who you will interact with over the entire life of your new loan.

Think you’re a good candidate for student loan refinancing? U-fi is ready to help. Get started today!