1. Student Loans: Introduction
  2. Student Loans: What Can You Afford to Borrow?
  3. Student Loans: How Federal Student Loans Work
  4. Student Loans: Private Loans
  5. Student Loans: How Student Loan Repayment Works
  6. Student Loans: Paying Off Your Debt Faster
  7. Student Loans: How Federal Student Loan Consolidation Works
  8. Student Loans: Private Loan Consolidation
  9. Student Loans: Conclusion

Private student loan consolidation allows you to combine multiple private and/or federal student loans into a single, new private loan. The term “consolidation” is a bit misleading, though, because what you’re really doing is refinancing. But some people find it easier to think of the process as “consolidation” to directly compare private student loan refinancing with federal student loan consolidation. So we’ll use the two terms interchangeably in this chapter.

How Private Student Loan Consolidation Works

Banks, credit unions and private lenders, including online-only lenders, offer private student loan consolidation. In fact, some financial institutions that don’t actually issue private student loans do refinance them. Some of the well-known companies that offer private student loan refinancing as of November 2017 include SoFi, Earnest, LendKey, SunTrust, Laurel Road, Common Bond, Wells Fargo, Citizens One, College Ave and Discover. Many lenders that issue private student loans also refinance them.

When you refinance your student loans with a private lender, your repayment period may be anywhere from 5 to 30 years depending on your lender, your credit score and the amount you’re consolidating. Unlike federal student loan consolidation, private student loan consolidation may entail application, origination and/or prepayment fees.

At what point do you become eligible to refinance with a private lender? It depends on the lender. One lender might require you to already have a 24-month repayment history on your student loans. Another might allow you to refinance while you’re still in school. Still another might require you to be enrolled less than half time or on track to graduate by the end of the semester. 

These differences underscore one of the most important things you need to know when refinancing with a private lender: Every lender’s terms are different; peruse the website’s FAQs and read every sentence of your loan paperwork before you commit. Private lenders also offer different interest rates, and you might qualify for a significantly better rate with one than with another.

The lender will also likely require you to be employed or to have an offer for full-time employment that begins in the next few months. Unlike federal loans, there’s no pile of taxpayer dollars for private lenders to fall back on if you stop repaying your loan. Private lenders have stricter requirements and do much more underwriting before they’ll approve you.

Your interest rate will be based on how risky you appear to be as a borrower. Lenders evaluate your risk by looking at your credit score, income, debt, job history and sometimes your educational background. Having a cosigner with good credit may lower your interest rate. You’ll also need to be in good standing on your existing student loans. Lenders don’t want to take on a new client who already looks problematic.

In general, you can refinance your student loans anytime, as long as you meet the lender’s requirements. You don’t have to do it right after you graduate, and you can do it more than once. If you can get a lower interest rate than you have now, refinancing can save you money and saving money is the goal.

Loans You May Want to Exclude

As we explained in the federal consolidation section, you might not want to include all your loans in a private consolidation. Here are the loans you might want to exclude:

– any loan with a lower interest rate than you could get by refinancing

– any loan you’ve almost paid off (refinancing with lengthen your repayment period on that loan, which means more interest)

– any federal loan whose protections you don’t want to lose

– any private loan whose terms are better than those you could get with a new lender (for example, your existing lender discharges loans upon death or offers deferment if you return to school, and you can’t get approved with a new lender that offers the same)

Benefits of Consolidating Private Student Loans

Private student loan consolidation is best for people who have a secure job, emergency savings, strong credit and enough cash flow to comfortably pay all their monthly obligations. It’s also for people who aren’t seeking loan forgiveness. (See Student Loan Forgiveness: How Does It Work? and Do You Really Have Student Loan Forgiveness?)

In addition to lowering your interest rate, monthly payment, total borrowing cost or some combination of these, consolidating your private loans can allow you to release a cosigner if your income and credit are stronger than they were when you applied for the loans you have now. If your mom or dad cosigned on your loan, releasing them from the threat of having to make your loan payments if you can’t could be a real weight off their shoulders and might help them retire. Some private lenders may even allow a child to refinance a parent PLUS loan in the child’s name.

Cautions When Consolidating Private Student Loans

If you refinance federal loans into a private loan, you may lose certain benefits that are exclusive to federal student loans, including interest-free deferment on subsidized loans, access to repayment plans based on your income, and loan forgiveness programs such as Public Service Loan Forgiveness. Private lenders, if they offer deferment or forbearance at all, are not required to do so under certain circumstances or under the same terms that federal loans do.

In addition, if you die with outstanding private student loan debt or if you become permanently disabled, private student loans may not be canceled, meaning that your cosigners, your estate or your spouse might be responsible for them. Borrowers serving in the military are also at risk of losing special benefits associated with federal student loans, though all military borrowers are eligible for the benefits defined by the Servicemembers Civil Relief Act, which limits interest on loans taken out before joining the military to 6%. (See Preparing Finances for Deployment: A Guide for Service Members.)

Private student loans can have either a fixed or a variable interest rate. A variable rate is based on a market index such as LIBOR or the prime rate plus a margin, and it may change as often as once a month. Choosing a variable rate loan might look like a better deal than choosing a fixed rate loan today; it may shave 1% off your rate.

But will it still be a better deal if interest rates go up? What are the highest and lowest rates your lender will charge you on a variable rate loan if market conditions change? How often can your rate change, and how much notice will you get? Variable rate loans are best for people who are comfortable with uncertainty and who have a solid plan to repay their loans quickly.

If you don’t qualify to refinance with a private lender or if you can’t get a good interest rate, you could ask a parent with good credit to cosign. However, if they agree, they’ll be on the hook for your loan payments if you become unable to make them for any reason. (Return to chapter 4 for more on the drawbacks of cosigning.)

As with federal consolidation, private consolidation is not reversible so make sure you’re comfortable with the decision before you sign the loan paperwork. Also, make sure to read the fine print of the loan terms since the new terms will be different than your old terms. Key terms to be aware of include what your options might be during financial hardship or disability, whether your loans will be discharged when you die and if you can release a cosigner without refinancing.

Finally, if you’re consolidating any loans that are currently in a grace period, be aware that you may lose the grace period when you refinance.

The 0% APR Credit Card Balance Transfer Option

Credit cards sometimes have 0% introductory rate offers for new applicants or existing cardholders who have good credit. You can use a balance transfer to pay off almost any type of debt you want, including student loan debt.

There are three ways to do a balance transfer:

1. Use the paper balance transfer checks mailed to you by your credit card issuer. Make a check out to your student lender and send it in (or make the check out to yourself and deposit it in your bank account and then pay by regular personal check as usual). Be sure to follow the lender’s instructions for loan payoffs or large one-time payments.

2. If applying online for a new card that has a balance transfer offer, request the transfer as part of your application. If your application is approved, the credit card issuer will send the amount you requested (or the amount it approves, if less than your requested amount) to your student lender.

3. If taking advantage of a balance transfer offer with your existing credit card issuer, log into your account and look for a balance transfer option somewhere in the menu bar. Complete the information about how much money you want to pay to which lender, and the payment will be sent electronically.

No matter how you do the balance transfer, the end result will be a lower student loan balance and a new credit card balance for the student loan amount you just paid off – plus the balance transfer fee.

You must then be sure to pay off the balance transfer before the 0% period ends. If you don’t, you could end up spending more on interest than if you had never done the balance transfer at all. (For more information on how balance transfers work, read Understanding Credit Card Balance Transfers and The Pros and Cons of Balance Transfers.)

Student Loans: Conclusion
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