Refinance Student Loans - Exploring Your Options

While going to college is a dream many Americans are able to fulfill, graduation can mean facing the stark reality of having to pay off debts accumulated while studying. In the US most students get their loans via a federal program which allows the money to be  borrowed and repayments deferred until college is finished.

Very often the loans form part of an overall financial package which might also include work placements, scholarships and grants. Despite being subsidized by the government, interest is still added but usually around 2 percentage points less than the typical unsecured loan available in the market.

It is also possible to get a private student loan either instead of a federal package or to supplement it. Private student loans can either be secured or unsecured but the interest rate varies significantly across the market. It is also not unusual to find a student loan which accrues one rate of interest whilst the individual is at college but increases once they leave.

Loans typically become payable between 6-12 months once college has ended - although some have a clause stating that if the hours studied drop to less than 50% payment is due straight away.

Once the repayments become due, many students consider the possibility of refinancing in order to lower the monthly amount and make it more affordable.

As well as providing the initial loans, there is also the possibility of federal consolidation. In this kind of refinancing deal, the Department of Education purchases the debt and a new loan with a fixed interest rate is issued. The interest rate upon consolidation is not changed from the original rate of the loan. However, lowering a monthly repayment will extend the term and ultimately mean more interest becomes payable.

Private sector refinancing is very different because the companies will be seeking to make a profit from taking on the student debts. This means that in most cases a higher interest rate will become payable, even if the monthly repayment amount reduces.

Another fundamental difference between federal refinancing and private firm consolidation is that the state-backed scheme has no minimum balance. Any student with outstanding debts qualifies to refinance their loans with the Federal Direct Consolidation Loan program. However, in the private sector, firms may not be willing to consider refinancing student debts for less than a minimum sum. A few lenders will consider offering terms for students owing as little as $5000 but the majority will not take on the debts unless they are at least $7000.

For those who come into some money and want to repay some or all of their loan early, the federal scheme does not carry a penalty for early partial or full settlement. In the private sector, fixed financial penalties may apply or either additional payments or early settlement so it is worth checking the small print.

To come to a decision about the best route to refinance a student debt, a loans calculator can be a great help. By experimenting with the figures it is possible to work out the best way to repay the loans, at the cheapest monthly rate without committing to repaying more money in the longer term.