There is no question that a college degree matters more today than it has at any point in recent history.  Higher education, and especially a four-year degree, has become the new minimum standard for the vast majority of jobs created today, replacing the previous minimum standard of just a high school diploma.  Unlike high school, however, a college education in the United States is tremendously expensive, averaging $10,000 per year for state schools and over $30,000 per year for private schools — and this just covers the cost of tuition, leaving students on the hook for housing, books, and a small library of miscellaneous fees.  Few students, or families of students, have the wherewithal to afford such large sums up front, making it necessary to turn to government and private loans to cover the costs of their education.  This, in turn, has led to spiraling levels of student debt, which has overtaken credit cards in US households as the main source of debt.  The average American owes just under $40,000 in student loan debt, amounting to a national total of a trillion and a half dollars owed for the privilege of a college education — debt that must be repaid regardless of whether or not a student graduates, and whether or not they find a good job.  Worse still, many students take out debt when they are too young or inexperienced to understand the life-long obligations this decision will incur.  About two-thirds of graduating students carry loan debt, while the average amount of this debt has grown by 50% in the past decade.

Student loan debt is a much fiercer obligation than other types of debt.  It cannot be discharged in bankruptcy and delinquency often results in the loans falling onto the shoulders of family members.  Furthermore, some interest rates can be positively brutal, especially since the federal government lifted caps on interest rates in 2006, resulting in some unlucky students having to repay nearly twice as much money over the course of their lives. Despite government policies in place to ease student loan repayments, many borrowers who qualify for these policies often do not understand or do not participate in them, or are rewarded for earning less rather than more, or do not get enough assistance to prevent their personal finances from being affected.  All told, it represents a huge stress on the financial and mental health of millions of Americans.

Refinancing student loan debt can be a way out of the woods for many people who worry about the money they owe.  By refinancing, it’s possible to get a lower interest rate, minimizing the harsh mathematics that make the repayments in total exceed the original value of the loan, often by significant amounts.  Refinancing leads not only to lower payments but also better credit and, in turn, more options to find jobs or housing that may not be available to those with poor credit or delinquent debt.  Refinancing or consolidating loans can ultimately result in Americans getting out of debt sooner.

Why Interest Rates Matter

Any time you borrow money, whether it is for education or for a new car or just to cover bills until your next payday, you must agree to the interest rate terms set out by banks or lending agents.  Interest is, and always has been, part and parcel of taking out a loan.  However, interest rates of even a small percentage mean you’ll have to repay a lot more money.  A person who takes out $100,000 to pay for school with a 7% interest rate over ten years will repay an additional $40,000 over the life of the loan; they’ll have to fork over even more money if they do not make each repayment on time and in full.  Refinancing this loan with just a slightly lower rate, dropping from seven percent to six percent interest rates, will save the borrower ten thousand dollars over the lifespan of their debt load.

Students who took out federal loans, rather than private loans, may believe that they are receiving the best possible interest rates, especially when the government itself propagates this idea.  It’s rarely true, however, especially in terms of refinancing.  Since private lenders are not necessary beholden to the government’s mandates, it’s possible for them to provide a refinanced interest rate lower (sometimes much lower) than the original value.  Prior to the Student Loan Certainty Act in 2013, interest rates for student loans stayed high at the same time that interest rates for other loans, like mortgages, dropped to historic lows.

Consolidation vs Refinancing

While there are two popular options for managing student loan debt; consolidation and refinancing, these two options are not the same thing.  While both can provide relief for high loan interest rates, potentially saving thousands of dollars, one may be better than the other depending on the situation and the finances involved.  Consolidation is a popular debt relief process for people with multiple credit cards or mortgages, combining the loans together into one package that is easier to understand and manage.

A direct loan consolidation is only available through the federal government and only applies to federal student loans.  The new interest rate is based on the weighting of the previous interest rates.  A private consolidation through a private lender, by contrast, will give you an interest rate that depends on your credit health and history.  In this sense, a direct loan consolidation is similar to refinancing, but can potentially be done for all loans and not just select ones.

Which option is better for a person with lots of loan debt and high interest rates?  When you have multiple loans and/or multiple loan providers, consolidation can be just as great a mental relief as a financial relief.  Dealing with one bill per month rather than several, and on several different terms, can go a long way towards keeping your thoughts positive and forward-facing.  What’s more, consolidation might give a person that most valuable resource of all, time, by extending or contracting the duration of the loan as needed.  Consolidation allows a person to extend the length of the loan up to thirty years, a major cushion for those who may be facing budget crunches.  Finally, consolidation allows any person to switch from variable-rate interest (which can fluctuate up, as well as down, according to the underlying benchmarks) to a fixed-interest rate, keeping repayments consistent rather than subject to changes beyond a person’s control.

Consolidation, however, is not a magic bullet and is not necessarily the best option for everyone.  The largest drawback is also tied to the largest benefit: by extending the duration of a loan, a person may have shorter payments in the meantime but will pay more, and potentially much more, over the lifespan of their loan.  For a person who has the good fortune to improve their financial situation year-over-year, this isn’t too great a sacrifice to make, but for a person who has less options for career advancement and financial improvement, it can be a major drag on their wallet.

Furthermore, consolidation may cause you to lose particular benefits initially applied to a repayment plan.  For example, some loans come with interest rate discounts depending on successful repayments or credit improvements.  These can be lost with a consolidation, as they may only apply to one loan out of many.  Some loans come with principal rebates that decrease the amount owed after benchmarks (such as 24, 33, or 48 months).  These too can be sacrificed in the process of consolidation.  Additionally, any credit gains made on the back of these loan repayments may be lost after consolidation.

There are a few limits to consolidating loans.  Multiple loans can be bundled together immediately after graduation, or if you have to take a leave from school (including dropping below a certain credit limit in any given semester).  Loans can only be consolidated when in repayment or the grace period after graduation; loans that are past due or in delinquency may not be eligible for consolidation.  Finally, you can only consolidate any given loan if it is packaged with another loan, potentially creating a situation where the drawbacks of one loan are negated at the cost of the other loan’s benefits.

The Case for Refinancing

Refinancing student loans usually puts a person further ahead than consolidation alone, because there is no guarantee that consolidation will provide a better interest rate that reduces payments over the long run.  What’s more, many students adopt a mindset of choosing an interest rate and forgetting about it, selecting the rate upon graduating and then never taking a second look at it, losing huge sums of money over the long run as their credit and personal finances improve and allow them access to a better rate.  Refinancing is not a particularly difficult process provided that the borrower has the credit and repayment history to justify a lower rate.

Some (but not all) federal loans can be refinanced by some (but not all) private lenders.  Some federal loans have forgiveness options (such as working in public services for a period of 120 loan repayments) whose stipulations may be rendered void by refinancing, and may be a better option altogether than refinancing or consolidating loans.  Even so, most refinancing options provide immediate tangible relief for loan debt.

By far the most important factor when considering refinancing is the amount of money that you can save over the long and short term.  Giving up benefits can be painful, but dropping your interest rates by even a single percentage point can result in thousands of dollars of savings.  A student loan calculator that measures balance, term, and interest will help understand the raw numbers behind the decision by calculating your total obligation under your current repayment plan compared to the savings that could be achieved by refinancing.  ParentPLUS and GradPLUS loans receive the greatest benefit by refinancing because their interest rates can soar as high as 9%.  While a calculator may not be able to tell a person exactly what rate they can qualify for, it gives them an idea about how much money they could save by dropping into different interest rate brackets.

A competitive rate makes refinancing with private lenders much more appealing than consolidation.  Private lenders will check credit scores to calculate the interest rate they can offer, but this is considered a “soft check” that does not affect the credit score itself, making it possible to shop around for the best interest rate without any credit risk.   Private lenders, furthermore, have much greater flexibility and can offer fixed or variable rates as needed.  Those looking for either the option to shorten the lifespan of their loan, or to reduce their monthly payments, can find a solution to their issue.  What’s more, a private lender can provide further services, such as credit improvement strategies, career support and professional advice, or even financial planning to make certain that plans align with financial health.

Questions To Answer

Refinancing represents a major decision even if the process itself is not that complex.  The very first question that a person considering refinancing should answer is what their goal is.  It’s easy to wish away loan debt, but much harder to draw together a comprehensive plan to get out of debt in the short- or long-term.  Carefully consider financial health, career paths, and other money-related goals (such as purchasing a home or starting a family) before planning how you’d like to repay your loans.

Next, consider the total amount of money owed.  A relatively small amount of student debt (say, less than five thousand dollars) could possibly be re-paid in a year or two even if this path would demand major financial commitments; it’s better to have less spending money in your pocket if the payoff is decades without debt.  Conversely, a much higher level of debt may need to be carefully managed over a far longer term.  Larger loan debt may not be preferable, but it does provide a lot of flexibility for the term and duration of loan repayments.

Ask yourself how much money you want to commit each month to student loan repayments.  Federal guidelines state that “affordable” repayment amounts to 10% of discretionary income, but there are not many people out there who can afford to give up one dollar in each ten they make.  Start by identifying the necessary expenditures in life (namely rent, groceries, and bills) and take a look at the money left over.  Next, look at previous loan payments you’ve managed to make and ask yourself what path you’d like to follow: saving more money on payments, paying more debt down, or staying at a stable level.  If you can live frugally, you can take major steps towards repaying your loans.  However, it’s ultimately better to be happy with your finances than it is to be debt-free.

Next, take a long look at your credit score.  Not many people have the credit score they’d like and you may be able to save more money in the long run by taking the time to improve your credit score before pursuing a loan refinance.  Even if you’ve not done as well as you’d hoped meeting repayment deadlines, you can boost your credit score by paying down other debts and opening new credit cards — provided, of course, you can pay the balance in full each month.  Remember that a credit score at or above 740 will get you access to the best possible interest rates, not just for loan refinancing, but also for mortgages and auto loans.

Finally, consider whether or not you need a co-signer.  You may have already had a co-signer for the original student loans, but in the event that your credit score has not improved enough, you can benefit by having a co-signer who agrees to be the insurance policy for repayments.  Just be certain that the co-signer them self has good credit and is willing to take on the (not trivial) financial risk of a default.

The Future of Loans

On the surface, loan providers seem to be made in the shade with lemonade — their services are in constant demand, millions of new customers come about each year, and their profit margins are quite healthy.  The overall health of the loan industry, however, isn’t as sterling as you might think.  Sweeping proposals are threatening to upend the traditional business structure of student lending.  Now that one party controls all branches of the government, it’s much easier to pass student loan reform.  President Trump’s proposals for loan reform would raise the credit limit cap from the current 10% to 12.5%.  While this change would result in higher monthly payments, it would also allow for debt forgiveness after 15 years of repayment rather than the standard 20-year repayment schedules.

Trump is also expected to try to combine lending and repayment options to streamline the process.  The government currently offers two repayment plans (for undergraduate and graduate debt) and Trump has stated the need to roll both into one plan for both types of debt.  Furthermore, his Department of Education has stated that it will be a priority to consolidate all nine federal loan servicing companies into one entity.

One area of bipartisan agreement between both parties is an agreement that the government should do more to offer subsidies and offsets to encourage employers to assist in paying down their workers’ student loans.  Many companies already have some student-loan repayment subsidies as employee benefits.  A new bill would allow more companies to deduct money contributed to employee student loan repayments, with employees receiving as much as $5,000 per year in tax-exempt benefits to pay back their loans.

The Federal Reserve’s ability to raise and lower interest rates (independent of politicians on Capitol Hill) can potentially make more of a difference to student loans than any other change.  The Federal Reserve is anticipating three separate rate hikes through 2017 and potentially more in 2018 as the dollar grows stronger.  These will not affect students with fixed-rate interest, but variable-rate interest loans will likely see rates rise.  Those concerned about the long-term fluctuation in interest rates should consider refinancing with a fixed-rate interest, especially if they can lock in a lower rate before the Federal Reserve carries through the next rate hike.  The decision to raise or lower interest rates generally follow 10-year Treasury bonds; pay close attention to these bonds’ value during the upcoming spring and summertime, when they will consider moving the needle.

Conclusion

More students than ever are signing up for loans that will cover the cost of their education but require years or even decades of repayment.  Student debt in the United States has hit critical levels, eclipsing one trillion dollars in total, and many people with student loan debt worry that they will never be able to repay what they owe.  Refinancing loan debt offers an excellent solution to cut down on the interest rates that tack on additional costs to the principal of the loan.  However, refinancing is not a blanket solution for everyone.  Some would do better consolidating their loans, while others enjoy privileges or even forgiveness depending on the origin and stipulations of their loan.  Even so, refinancing is a simple process that can save tremendous amounts of money over the lifespan of a loan.  Anyone with significant loan debt, or concerns about their ability to meet their financial obligations, should look to refinancing as a valuable tool to cut interest rates down to lower their payments and allow them to get completely out of debt at the earliest possible juncture.