How to Refinance Your Student Debt

You've graduated from college, launched a career, and maybe gotten married or purchased a home. But one part of your past continues to give you headaches: your student loans.

The rate of increase in the average amount students borrow has slowed in recent years, but borrowers are still racking up debt -- about $25,000 to $30,000, on average, on the way to graduation, according to the College Board. Worse, when it comes to repaying that debt, many people juggle half a dozen loans or more with different repayment terms, interest rates and loan servicers.

Refinancing into a single, consolidated loan can be the solution to this maddening process. Not only does it reduce your monthly payments and the number of loan servicers you have to deal with, but it can also help lower your overall interest rate, saving you money over the life of your loans.

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Assess the Mix and the Goal

Whether to refinance -- and how -- depends on the types of loans you have and what you're trying to accomplish. Start by identifying which of your loans are federally sponsored and which, if any, are private. You can use the National Student Loan Data System website to retrieve information about your federal loans. Direct loans, once called Staffords, are the most common of the federal loans for undergraduates, followed by Perkins loans.

Review the interest rate on each loan, along with your monthly payment amounts, and see how they fit into your overall budget. Then consider whether you’re looking mostly for convenience, a more flexible repayment plan or a lower interest rate. If you can afford to accelerate payment on some of your loans, you may want to handpick the loans to combine, keeping one or more aside and funneling extra cash toward early repayment. Keep in mind that provisions for federal and private loans differ. You could lose valuable benefits by taking federal loans to a private lender.

The Department of Education’s Direct Consolidation Loan program allows you to combine multiple federal student loans into a single, fee-free loan, with one interest rate and one monthly bill. Most federal loans, including direct loans, Stafford loans and Perkins loans, can be consolidated. You can even move a single federal direct or privately sponsored Stafford loan into the consolidation program to take advantage of other repayment options. The fixed interest rate on your new loan will be the weighted average of the interest rates on the loans that you combined, rounded up to the nearest one-eighth percentage point. (In the 2015-16 academic year, federal direct subsidized and unsubsidized loans carried a fixed rate of 4.29% for undergraduates; the rate changes annually. Perkins loans carry a fixed rate of 5%.) Use the loan-consolidation calculator at www.findaid.org/calculators to see the new interest rate depending on which federal loans you consolidate.

Grad PLUS loans, the federally sponsored loans for graduate students, as well as Parent PLUS loans, can be consolidated with the feds, too. (In 2015-16, these loans both carried a fixed rate of 6.84%.) Parent PLUS loans are not eligible for income-based repayment or forgiveness, as Grad PLUS loans are, nor can they be consolidated with any federal loans that your child is paying off.

Federal loan consolidation won't help you snag a lower interest rate, but it may give you access to repayment options for which you didn't previously qualify, such as certain income-based plans. The most straightforward and cost-efficient option, however, is the standard 10-year repayment plan -- you pay the same amount each month until your loan is repaid.

If loan payments are sinking your budget, consider a plan that stretches the loan over a longer period or that gradually increases the amount you pay each month. Or, if you qualify, you could select an income-based plan that lets you put 10% to 20% of your discretionary income toward your loans for 20 to 25 years, after which any remaining amount is forgiven. To find a repayment plan that works best for your budget, go to www.studentloans.gov and click on "Repayment Estimator" under "Managing Repayment." The longer the repayment period, the more you will ultimately pay, so pick the plan with the highest monthly payment you can afford.

Refinancing Private Loans

If you have good credit, a stable job and steady income, you'll generally benefit from refinancing your private loans. The federal consolidation program does not accept private loans, so for those loans, you'll have to work with a private lender. You'll likely score a lower interest rate than you received during your college years, assuming you have established a good credit history, and you will also be able to release any cosigner from the loans -- welcome news to whoever would otherwise be left on the hook if you were to default.

The higher your credit score and the stronger your overall profile, the lower the interest rate you’ll receive on a private consolidation. With most private lenders, you'll have a choice between a fixed or variable interest rate. Fixed interest rates generally range from about 6% to 12%, and variable rates currently run between about 2% and 8%. Some lenders charge an origination fee, typically up to 2% of the amount of the loan; others roll those costs into the quoted interest rate.

With interest rates near historical lows, opting for a variable rate can be a smart strategy. Rates will likely creep up as the Federal Reserve aims for higher short-term rates, but variable-rate loans can still pay off if you'll be able to pay down much of the debt before the rate climbs significantly, says Joe DePaulo, cofounder of College Ave Student Loans, a private lender.

Repayment choices. You''ll probably be offered repayment terms in five-year increments from five to 25 years, but some lenders will allow you to select your repayment term -- say, three years or nine years. And some will sweeten the deal by reducing your interest rate if you agree to a shorter repayment period. Private student loans don’t generally have flexible repayment options.

Refinancing your private loans can save you serious bucks. Say you have $30,000 in private loans with interest rates averaging out to 10% and a 10-year repayment period. If you qualified for a 6% fixed-rate loan paid over 10 years, you would pay about $60 less each month and save $7,606 over the life of your loan. To see how much you could save, visit www.studentloanhero.com/calculators/student-loan-refinancing-calculator.

Many lenders will refinance both federal and private loans, but consolidating federal loans with a private lender means you’ll lose federal benefits, and you might not even save money. That’s because only borrowers with the best credit qualify for private rates that fall below current federal rates, with the exception of PLUS loans. Before taking any of your federal loans to a private lender, consider whether the rate you might get is worth the benefits you’d be giving up, says Anita Thomas, senior vice president at Edvisors.com.

To refinance with a private lender, start by contacting your current loan servicer and bank, as well as a few other lenders, such as College Ave Student Loans, Citizens Bank, Darien Rowayton Bank and Wells Fargo. Get several quotes so you can compare interest rates and terms. A number of nontraditional lenders have popped up in recent years. Such lenders often use different standards than traditional banks do when qualifying ap­plicants, or they cater to a certain demographic. Borrowers who work in high-income fields or have strong credit may want to consider such companies, including CommonBond and SoFi. You can find additional lenders at Credible.com, Studentloansherpa.com and Studentloanconsolidator.com.

Scams that target people struggling with student debt have been on the rise. To weed out scammers, check companies' profiles with the Better Business Bureau.

Keep Federal Loan Benefits

Generally, sticking with the feds allows you to keep federal loan benefits, including deferment, forbearance and loan forgiveness. (Perkins loans carry generous forgiveness provisions that disappear in a consolidation, giving you reason to keep those loans out of the mix.) Deferment and forbearance allow borrowers to postpone or reduce payments during unemployment or other economic hardship. And about one-fourth of U.S. workers, including teachers, social workers, nurses, police officers and those who work at nonprofit organizations, are in public-service jobs that may qualify them to have the remaining balance of their federal loans forgiven after 10 years under an income-based repayment plan.

For more information or to apply for a direct consolidation loan, visit www.loanconsolidation.ed.gov.