Consolidate or Re-Fi Student Loans?

After you leave college – whether by graduating or dropping out – the clock starts ticking on repaying those student loans.

Yikes! The monthly payment is how much?!

An exit meeting with the financial aid office might be the first time a student is aware of just how much money they must repay and how the interest adds up. You see, whether it’s a federal loan or private loan, the lender does charge interest—a fee—for the money borrowed.

Let’s talk about those federal student loans.

Prospective college students are often encouraged to apply for federal loans before private student loans. (After you filed the FAFSA—Free Application for Federal Student Aid—the award letter you received from your college indicated your eligibility for this type of loan from the federal government. Private loans, on the other hand, are made by banks, credit unions, state agencies or a college.)

Federal loans are considered more beneficial to borrowers, in most cases, because:

 Interest rate is fixed, not variable

 Income-driven repayment plans are possible

 No credit check is needed

 No co-signer is needed

 Interest may be tax deductible

 No prepayment penalty is added

 Partial loan forgiveness is possible

These federal student loans come in two flavors: direct subsidized loans and direct unsubsidized loans. Both types incur interest and both have an upfront loan fee, calculated as a percentage of the amount being borrowed. This fee is deducted as you receive each loan disbursement during college.

Subsidized loans are offered to undergrads with financial need. Subsidized means the U.S. Department of Education pays the interest on your loan while you are in college and for the first six months after you graduate, leave or go less than half-time.

Unsubsidized loans are available without demonstrating financial need. You must pay all the interest.

Interest rates for both types are set by Congress, and are fixed over the life of your loan. For undergraduates granted a federal student loan before July 1, 2016, interest rates range from 3.4% to 6.8%. The current rate is 3.76%. Find updates and specific rates at the U.S. Department of Education site.

Typically, repayments kick in 6 months after leaving college or when you go less than half-time. You are notified when to send the first payment, and payments are usually due monthly. You will probably make these payments for the next 10-25 years, depending on your repayment options. The payments include both principal and interest.

Your loan interest is calculated as simple daily interest, and it accrues monthly. This is the formula provided at

Outstanding principal X Days since last payment X IR factor*

=  Interest to be paid
*IR, interest rate factor = rate divided by #days in year

When you know how much your monthly loan repayment will be, you might be surprised. You can make the stated payments until your loan is paid off—in other words, accept the terms. Or, you might be able to:

1. Do a Direct Consolidation Loan

This means all your federal loans are rolled into one, thereby simplifying and making one payment. You may be able to lower the monthly payment this way, but it can extend the number of years you repay. The government does not charge a fee for Direct Consolidation, but you should weigh your options. Consolidation cannot be reversed once your loans are combined, the interest rates may change, and you may lose some benefits associated with your original loans. Before you apply, contact the Loan Consolidation Information Call Center at 800-557-7392.

2. Refinance with a private lender

Refinancing means using a non-government lender to roll your federal and/or private student loans into a package with a lower rate. This is a possibility. But you may not want to give up the benefits of a federal student loan, even though the interest rate is likely higher.

If you have a good job with stable income and have built a good credit history, you can probably refinance to reduce your interest rate, and thereby reduce the monthly payment. One thing to understand…you might be switching from a fixed rate to a variable interest rate. That means your monthly payment will go up when interest rates go up.

To compare your refinancing options, gather your information:

 How much did you borrow in total?

What type of loans do you have – federal, private or both?

 What’s the interest rate on each loan and how is it calculated?

 Who is the lender for each?

Next, check to see if you qualify for refinancing:

•  What is your salary?

 What is your credit score?

 What’s the deadline to decide?

Neither consolidation nor refinancing forgives your original loan amounts – you must still pay off the loans. However, some federal loans may have a forgiveness option, depending on the job you take.

If you have questions about student loan repayment, one of the best sources is student

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