Congratulations, you’ve graduated from college! Now what?
If you’re like a majority of grads out there, you have something big weighing on your mind: student loan repayment. According to Experian, total student loan debt is now $1.2 trillion—yes, TRILLION—and with the rising cost of education that amount won’t be going away any time soon.
When I graduated from business school in 2012 I had over $100k in student loan debt and I was searching for something (anything, really) to help with my payments. During our last week of school we were handed pamphlets for repayment options, but there was so much information—I was overwhelmed to say the least.
The two main options I found were loan consolidation and loan refinancing. While sometimes used interchangeably, consolidation and refinancing are actually quite different and there is no one-size-fits-all solution when it comes to picking the best option for your loans.
So, in an effort to offer the help I didn’t have, I spoke with Christina Kramlich, Sr. Director at student loan refinancer SoFi for her advice. Here’s a quick guide breaking down the different loan repayment options.
Loan consolidation is exactly what it sounds like: combining multiple loans into one. The benefit of consolidation is that instead of having multiple different payment dates and amounts, you only have to manage one payment each month. There are federal loan consolidation programs available so you can consolidate and still have a federal loan post-consolidation. You’ll see below that in certain situations, having a federal loan can provide great protection and benefits.
The interest rate during consolidation typically doesn’t change, so consolidation won’t save you money. If you have multiple loans at different rates, you’re given the weighted average interest rate of the loans you’re combining.
During loan refinancing, whichever private lender you choose pays off your old loans and consolidates and refinances them into one new loan with a different (and hopefully lower) interest rate. There are no federal options for refinancing so all refinanced loans are through private lenders and you will end up with a private student loan once you refinance. If you currently hold federal student loans, SoFi is one of the few companies that can refinance both your federal student loans as well as your private student loans.
While refinancing can save money if you are able to score a low interest rate, being approved for refinancing can depend on things like your credit score and your income.
Now that we have the basic differences out of the way, there are some things you’ll want to consider when looking at consolidation and refinancing options.
Federal Loan Protections
If you have federal student loans, you might not realize that they come with some nice features that private student loans generally do not have. If you choose to refinance, you could potentially be losing some of the benefits like:
- Forbearance and deferment: these options allow you to pause payments on your student loans if you lose your job or experience other hardships. You generally keep this protection when you consolidate but not all student loan refinancers offer this option. SoFi does offer deferment if you lose your job and has a career service division that can help you find a new one (146 people have been placed in new roles so far).
- Income based repayments: this is protection to help ensure that your loan payments aren’t completely unmanageable. It caps your loan payments at 10-15% of your discretionary income by lengthening the life of your loan. You could end up paying more in interest but you will have the benefit of not struggling or defaulting on loan payments that you can’t afford.
- Principle forgiveness: If you are planning a career in public service, you may be eligible for principle forgiveness on your federal loans. With this program, any remaining principle left on the loan after 120 eligible monthly payments will be forgiven.
Interest Rate Options
When looking at refinancing options, pay attention to the interest rate offered as well as whether it is a fixed or variable rate. A fixed interest rate means that the interest rate will remain the same over the life of the loan, regardless of what is happening in the economy. Your payments won’t change each month or each year with a fixed rate.
A variable interest rate means that the interest on your loan can and will change. So if interest rates go up, the interest rate on your loan will go up, and your monthly payment amount will end up increasing. If interest rates go down, the interest rate on your loan will go down, and your monthly payment amount will end up decreasing.
SoFi offers an easy to use loan repayment calculator so you’re able to quickly see what your new student loan payment would be.
The default repayment period for standard federal loans is 10 years. But when going through the consolidation or refinancing process you will likely be able to change the length of your loan.
While increasing the term length, say from 10 to 15 years, can dramatically decrease your monthly payments you will end up paying a lot more in interest. Stretching out your loan can seem like a good idea when you’re struggling, but think about this option carefully before stretching it out too far. It may end up costing you a lot of extra money.
Be on the lookout for any additional fees that might be included in the options you’re considering. You’re doing all of this work to save money on your loans. Don’t ruin that with excess fees. Make sure you look for and understand any application, origination, or pre-payment fees that may come along with your student loan refinancing.
If you are struggling with student loans and refinancing is the right decision for you, SoFi is offering Everygirl readers $100 cash welcome bonus when you sign up using the link sofi.com/everygirl.
It can feel overwhelming when you’re just starting the loan repayment process, but do some research, get on a payment plan you can afford, and prioritize getting rid of your debt. It will feel amazing once you’re debt free.
This post was sponsored by SoFi but all of the opinions within are those of The Everygirl editorial board.