When you were embarking on your Student career, you probably took a Loan to cover your tuition and other student expenses. However, as you graduate and step off your campus, you are not only left holding your degree but a large student debt that you must pay off. Today, student loans are probably the second largest form of consumer debt.

The process of repaying a student loan can be rather daunting and if you are looking to save on your student loan repayments, the time and the headache of managing several payments every month, then you can think of consolidating your loans. So, the main criteria are whether to refinance or consolidate your loans and evaluate which option is right for you.

What Is Student Loans Consolidation?

Consolidation is essentially the process by which you can combine your multiple federal student loans into a single new federal loan known as a Direct Consolidation Loan. Consolidation allows you to pay one single payment monthly, instead of multiple payments.

You can decide on your loan repayment term; however, you will get an interest rate that is simply a weighted average of the rates on your existing loans. You can only consolidate your federal loans via this program and not your private student loans.

Pros and Cons of Federal Loans Consolidation

Some of the pros and cons of consolidating federal loans are:

Pros

Lower Payments

By consolidating your federal loans, your monthly repayments can be lowered and you can get up to 30 years for loan repayment.

Fixed Interest Rates

A Direct Consolidation Loan usually has a fixed rate of interest. This means that the interest rate will be at a flat rate and will not vary throughout the tenure of the loan until it is completely paid.

Unlike a private loan, which has a variable interest rate and varies according to the market conditions, the federal fixed rate does not vary but depends on your existing federal loans. The fixed interest rate is the weighted average of all your existing loans.

Eligibility for Benefits Renewed

When you consolidate your federal loans, the three-year period you get on postponements and forbearances gets reset, which means that if you have utilized your allotted time on deferments previously when the loan was taken due to economic hardship or unemployment, you will be eligible for deferment again. Also, you will get a benefit on forbearance, allowing you to postpone the repayment of your student loan temporarily.

Cons

Overall Payment May Be Higher

If you lower the amount of your monthly payment by increasing the tenure of the loan payment, for instance from 10 years to 30 years, then you may end up paying a higher amount of money in the form of interest in the long term.

Benefits from Your Original Loan May Be Lost

By consolidating your loans, you can lose your borrower benefits that you received originally like principal rebates and discounts on interest rates. You may also lose payment options like deferment or flexible payment plan. Consolidation may also invalidate any loan cancellations and may also cancel any eligibility you may have for forgiveness of student loans.

Loss of Grace Period

In the case that you are in your grace period and you decide on consolidating your loans, you will lose the extension period and will be required to begin making your repayments immediately. This also includes the interest benefits applicable for a subsidized loan, wherein the government pays your interest during the grace period so that the interest does not accrue.

What Is Student Loans Refinancing?

Refinancing is different from consolidation. Refinancing essentially allows you to consolidate all your loans into a new, single loan at a lower interest rate through a private refinancing company. Refinancing allows you to refinance both your federal as well as your private student loans.

This essentially means paying off all your existing loans and getting a new one with different payment terms and a different rate of interest. By refinancing your student loans at a lower rate of interest, your monthly payments will be much lower, which can help to free up more money that you can utilize to pay off more of the student debt, invest or save.

Pros and Cons of Refinancing Your Student Loan

Pros

Lock in the Low Rate of Interest

You may be able to lock in a low fixed rate of interest or a low variable rate of interest for your student loan spread over the tenure of the loan period.

Lesser Monthly Payments

You may be able to reduce your monthly loan repayments by either reducing the average rate of interest on your loans and/or by extending the term of loan repayment. However, you must keep in mind that by extending the term, you will probably increase the overall cost of the loan.

Reduced Total Costs

You can reduce the overall cost of borrowing by reducing your rate of interest on the current loans and/or shorten the term of loan repayment. If you can pay off the higher monthly payments comfortably, then reducing the tenure of loan repayment is a great idea.

Streamline Your Payments

By refinancing your multiple student loans into a single loan, you can make your monthly payments simple by combining all your payments into a single easy payment. This is helpful especially if you are currently making payments to more than a single loan service provider.

No Upfront Fees

Private refinance loans should not charge any application, disbursement, origination or prepayment penalty fees. In case the loan provider charges any fees, it’s a good idea to find a different one.

Rewards for New Borrowers

By refinancing your loans, you may become eligible for new rewards that can be money-saving for you that you may not have already redeemed or was unavailable for you earlier. You can save quite a lot of money on your loan by means of borrower rewards.

Removing or Replacing a Co-Signer

When taking out a new refinanced loan, you can remove or replace your co-signer, if you have one on any of your student loans currently. And, in the case that you add a co-signer on your new refinanced loan, then you must ensure that your new loan has a feature to release your co-signer.

Cons

Payment Based on Income

Private loans do not have the option of repaying your loans based on your family size and annual income. So, if you have a job that is low paying and a high monthly loan repayment amount, then choosing an income-based repayment plan would be the best option.

Loss of Federal Student Loan Benefits

By opting to refinance your loan, you may lose out on your current and future benefits offered by federal student loans like deferment, forbearance and loan forgiveness. If you feel that you will be eligible for some benefits in the future, then now may not be the right time to opt for refinancing your federal loans.

Higher Total Costs

In the case that you decide to extend the term of repayment of your student loan in order to reduce your monthly repayments, your total cost of the loan may increase and you may end up paying much more over the life of the loan. It is a good idea to prepare a monthly budget to evaluate how much you can afford to pay every month comfortably to reduce the overall cost of your loan.

Fluctuations in the Monthly Payment

If you are switching from a loan that charges a fixed rate to one that has a variable rate of interest, the interest rate will fluctuate and the rise in interest rates will result in an increase in your monthly payment and the total loan cost will also rise. If you prefer steady monthly payments without any fluctuations, then a refinance loan with a fixed rate of interest is the best option for you.

Loss of Borrower Rewards

If you opt for refinancing of your loan, any rewards that you are getting along with your current loan will be lost. So, ensure that you check for your eligibility of any new borrower rewards.

Is Consolidation or Refinancing a Better Option for You?

So, after considering the benefits and drawbacks of both consolidation and refinancing, deciding the one that is best for you really depends on your personal situation.

If your main objective is either to simplify the payments of your federal student loan and/or get a repayment plan that is income-driven, then consolidation of your loan may be a good idea. However, if your income is steady and you have a good credit score, then refinancing can get you a loan with better terms. The key is to understand that you’re converting your federal loan into a private loan.

Sometimes, both consolidation as well as refinancing may make sense. You could look at the option of consolidating your federal loans in order to simplify your repayments and once your creditworthiness improves, you could look at refinancing your loan to get a lower rate of interest.

Saving Money by Refinancing Your Student Loans

You have probably taken student loans while you were a student and are still paying a high rate of interest on your loans, and you are looking at options by which your creditworthiness and your stable income from your job can help you get a loan with a lower rate of interest. There are many private loan providers who can give you a loan with low-interest rates and competitive payment options via refinancing. By opting for refinancing of your existing loans, you can save a lot of money in the long run.

Eligibility for Refinancing

Most private companies that provide loans have two eligibility requirements that you, as a borrower, must satisfy.

• Basic requirements that you must meet for them to be considered for the loan.
• Guidelines that will allow the lender to determine your interest rate and also help the lender to determine if there is a risk for the purposes of lending.

Baseline requirements include:

• All your current loans must be in repayment.
• You must have a minimum loan amount.
• Minimum amount of on-time and full repayments to all loans that you want to refinance.
• Proof of graduation.
• Risk requirements depend on your credit history and creditworthiness. This helps the lenders to safeguard their money.

The details required by the lenders:

• Your minimum annual income.
• Strong credit history.
• Good credit score of over 720.
• If you don’t have much of a credit history, you may have to look for someone to co-sign the loan. Co-signers can help if you lack a credit history and their credit scores can also get you lower interest rates.

How Much Can Refinancing Save You?

While many borrowers think about refinancing their student loans to simplify their repayments, the majority have one objective in mind i.e. saving money. If you do qualify for the refinancing programs, you can end up saving a lot of money over the tenure of the loan.

Let us assume that your student loan amount is $30,000. The rate of interest for undergraduate loans is around 4.5% and around 7% for graduate loans. So, if your loan tenure is for 10 years @ 4.5%, your repayment amount will be around $310.92 per month and the interest amount that you would have paid for the entire tenure of the loan would be around $7,309.83 in 10 years.

However, if you refinance your loan at a fixed rate of 3.5% on a 5-year loan, you will be paying around $545.75 per month. On a 10-year loan, the monthly payment will be $296.66. On a 5-year loan, you will be paying a total interest of $2,745.14 and save around $4,654.69, while on a 10-year loan the total interest will be $5,598.91 and you will save around $1710.92. Some lenders may even allow refinancing at 2%.

Now if you are looking at a graduate school debt, the calculations will be a little different. If you have taken a $30,000 loan for 10 years and the interest rate is 7%, your payment will be around $343.33 per month and you would have paid $11,799.05 as interest only, which means your total loan amount will be $41,744.05.

However, if you refinance your graduate student loan with the same terms for either 5 or 10 years at a fixed interest rate of 3.5%, your savings on a 5-year loan will be $9,053.91 and a 10-year loan will be $6,200.14, which is significantly high.

Thus, you can see that by refinancing your student loans, you can save a significant amount of money and refinancing is an option that you must seriously consider if you’re looking for savings.

Choosing a Loan Term and Interest Rate

Apart from lower payments and savings on interest, you also have more flexibility in terms of choosing the tenure of the loan with student loan refinancing. You can opt from 5, 7, 10, 15 and 20-year replacement terms.

With a shorter tenure of repayment like 5 or 7 years, your saving on interest will be much higher, but you will also have a higher monthly payment. Whereas, with longer-term loans with repayment of around 20 years, you can have lower payments per month; however, the interest costs will be much higher.

In the case of student loan refinancing, you have the option of choosing either a fixed or a variable rate of interest, unlike federal student loans that have only a fixed interest rate.

Reviews of 5 Top Companies Offering the Best Student Loan Debt Consolidation

SoFi

SoFi is among the leaders in refinancing student loans and has helped thousands of students to lower their monthly payments and total loan cost. Started in 2011, SoFi has an excellent product portfolio.

Benefits of SoFi

• SoFi consolidates and refinances both federal as well as private student loans.
• Choose from term lengths of 5, 7, 10, 15 and 20 years.
• Rates as low as 2.795% for variable and 3.350% for fixed rates.
• No fees for application, origination or prepayment.
• Provides unemployment protection.
• Has an Entrepreneurial Program.
• The process of application is very simple.

Cons of SoFi

• The refinance opportunities are not available to students from Nevada.
• Does not have an option of co-signer release. If you apply for the loan along with a co-signer, the loan amount is on the name of the co-signer till the loan is completely paid off or until the death of the co-signer.

ELFI from SouthEast Bank

ELFI or Education Loan Finance was launched in 2015 by SouthEast Bank. SouthEast Bank has existed in the student loan industry for a very long time and has helped over a million families to secure financing for the purpose of higher education. ELFI provides student loans refinancing online.

Benefits of ELFI

• ELFI consolidates as well as refinances both federal and private student loans.
• It offers 5, 7, 10, 15, 20-year payment plans.
• ELFI offers low interest rates of around 2.39% in variable rates and 3.19% fixed rates.
• ELFI offers $100 as a fast track bonus if all the paperwork is completed in 30 days.
• No fees for application, origination or prepayment.

Cons of ELFI

ELFI does not have a co-signer release option and you cannot release your co-signer even after a specific time period of timely payments.

Citizens Bank

Although Citizens Bank is not one of the largest in the country, it is one of the only refinance and consolidation banks that has actual branches. Citizen Bank has over 1,000 branches and today is one of the top banks in the refinancing industry. The bank created the Education Refinance Loan via its education finance division and the loan was started to help students to manage their student loan payments in a better manner.

Benefits of Citizens Bank

• You can consolidate as well refinance both federal and private student loans with Citizens Bank.
• Citizens Bank offers low rates, around 2.78% for variable and 3.74% for fixed rates.
• Choose from term lengths of 5, 10, 15 and 20 years.
• No fees for application, origination or prepayment.
• You must have at least $10,000 student loan debt to refinance.
• 10 minutes for online application completion.
• Co-signer release available where you can apply for the removal of the co-signer from the loan after you make 36 on-time payments of the principal and interest amounts.
• You get an additional 0.25% discount on your interest rate if your co-signer has an account with Citizens Bank.

Cons of Citizens Bank

• Citizens Bank will not release the co-signer until they receive 36 months of timely payments from the borrower.

LendKey

Lendkey has gained a lot of popularity among students for student loan refinancing. It matches the borrowers with not-for-profit credit unions that offer student loan refinancing and consolidation. Lendkey has associations with over 300 credit unions, so irrespective of where you live, you can be matched to at least one credit union lender. Since its inception, Lendkey has benefitted over 4,000 borrowers in finding refinance for their student loans at a lower rate of interest.

Benefits of Lendkey

• Lendkey consolidates and refinances both federal as well as private student loans.
• Rates as low as 2.67% for variable and 3.25% for fixed rates.
• Choose from term lengths of 5, 7, 10, 15 and 20 years.
• No fees for application, origination or prepayment.
• Qualification via data-driven customer evaluation.

Cons of Lendkey

• Lendkey does not provide you with student loans directly, but connects you with a large network of banks and credit unions for your loan.
• Lendkey does not offer unemployment protection.

College Ave

Founded by Sallie Mae in 2014, College Ave student loans initially offered loans to students. They have entered the business of student loan refinancing very recently. They lend through First Trust Bank or Liberty Bank. Although, College Ave is a fairly new entrant, they have quickly established themselves as one of the best.

Benefits of College Ave

• College Ave consolidates as well refinances both federal and private student loans.
• It offers 5, 7, 10, 15, 20-year payment plans.
• College Ave offers low interest rates of around 4.13% in variable rates and 4.65% fixed rates.
• No fees for application, origination or prepayment.
• You can complete your application in just 3 minutes and get an instant credit decision.
• 5-15 years repayment tenure.
• Refinance amounts of both federal and private loans, as low as $5,000.
• 2-year interest-only option available.

Cons of College Ave

• College Ave will not work out for you if you do not have a moderate income along with a good credit score.

Are These Student Loan Refinancing Companies Legitimate?

While there are several student loan financing companies that are legitimate and reputable, there are many scamsters lurking out there too. So, before you go in for refinancing your student loans, make sure you research well and make a smart choice.

Student loan consolidation can be done free of cost. However, if a company charges fees for the service they offer is not really a scam. It is a scam only when the company does not complete the service you paid them for or mislead you on the services. Getting a reputable refinancing company to handle the consolidation of your loans can be a way by which you can get professionals to handle your loan portfolio in a proper and efficient manner.

If you are paying a company to help you with the refinancing of your loans, you must be specifically aware of what you are paying them for. You are paying them for their services to:

• Help you understand the best repayment strategy for you.
• The forgiveness options available for your loans.
• Process and manage all the paperwork for you properly.

A legitimate refinancing company will charge you fees for their service, which they should place in a third-party account and get paid only when the work has been successfully completed and if the work is not completed, you will get back your money.

Since all the paperwork takes time to prepare and submit, it may take around 3-6 months for the entire process or longer at times.

Identifying Scams

Here are some red flags that you must look out for that could mean that you’re getting scammed by the loan refinance company.

Stop Loan Payments

If your refinance company asks you to stop making your loan payments, then the company is probably a scam as no company should advise you to do this. You must always pay the minimum amount due on your loan statement.

Forbearance

Forbearance must not be used as a blanket approach and must be used on the “as needed” basis. It is used only in very specific situations and is not a solution that you can opt for always. If your loans are put into forbearance, you must understand the reason.

Make the payments to the company and they will make the payments for you. This is a big red flag as the company should not be taking any money from you and making any payments on your behalf.

If the Company Contacts You Using an Automatic Dialer

If the company contacts you and to take the call, you are required to press #1, then most definitely, this is a scam. Beware specifically of marketing documents with government seals containing all your financial information. For instance, a document that says, “Your student loan of $45,675 is pre-qualified to be forgiven.”

Company Claims to Work with the Department of Education

No loan refinancing company works with the Department of Education and if the company claims it does, then it is a scam. The Department of Education will never make calls to you, all their correspondence is always via their official email.

How to Look for a Genuine Loan Refinance Company

The best way to protect yourself from any scam is to do your research about the company before applying for a loan.

• Look for a list of known companies.
• Check forums to see if other borrowers are discussing the company that has contacted you.
• Check the services offered by the company. If the company only processes documents and you have to do all the rest of the work on your own, then what’s the point of using their services? Avoid companies that only process documents and do not provide any financial help, are not bonded or licensed and charge you to only do the paperwork, which you can do by yourself.
• Student loan refinancing is very regulated and the ways you can get help are documented clearly by the Department of Education. So, a refinance company cannot do more than the regular procedure. Avoid the companies who promise you things more than what is required.

Considering Student Loan Forgiveness Instead of Consolidation

Dealing with a student loan can become overwhelming after a while. An idea that is often discussed is the option of student loan forgiveness, where you have legitimate forgiveness programs that can help to waive off your student loans completely and save plenty of money in the process.

Sounds too good to be true? Well, not everything is as simple and straightforward as that. There are many restrictions on what should be done and who can qualify for loans to be forgiven.

Federal Student Loan Forgiveness

There are essentially two kinds of loan forgiveness programs:

Teacher Loan Forgiveness Program

In this program, you must teach 5 years consecutively in specified low-income schools and $17,500 of your student loan will be forgiven. The loans that qualify for this type of forgiveness are unsubsidized Federal Stafford Loans, direct subsidized and unsubsidized loans.

Public Service Loan Forgiveness Program

Under this program, if you work for a qualifying employer full-time, the remainder of your balance on the qualifying direct loan repaid after 120 monthly payments will be forgiven. When you make the last payment, you need to submit an application to receive loan forgiveness officially.

Pros of Loan Forgiveness

• A significant part of your student loan debt can be relieved.
• Many jobs qualify for loan forgiveness and it need not be strictly in the field of public service. You must just work for an employer that qualifies as a government agency or a non-profit organization.
• You won’t get a tax bill later in the case of the Teacher Loan Forgiveness or Public Service Loan Forgiveness Programs.

Cons of Student Loan Forgiveness

• There are stringent restrictions to qualify for student loan forgiveness and to remain qualified.
• The program limits your job prospects considerably, as you must work in the public sector.
• If you don’t qualify for the two designated loan forgiveness programs, there are not many more options. There are some federal income repayment programs that may allow loan forgiveness on the balance loan amount after some time. But you have to look for them and they may not be easy to come by.

The loans that you took as a student can get rather burdensome after a few years and juggling many student loans can become cumbersome too. In such a case consolidation or refinancing your loans can come as a welcome relief. You may also consider the option of student loan forgiveness.

However, before arriving at the which way to go, it’s a good idea to do some research and understand the pros and cons of each option before making your final decision.

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