Consumer Alert: Protect Your Money and Credit in College. Part 3: Refinancing vs. Consolidating Your Student Loans
So here’s a big tip for current students. If you’ve taken out a private loan, try to pay only the interest on that loan while you’re in school. If you have a federally guaranteed loan, interest is deferred until you graduate.
“When you refinance, you get a new loan basically at a lower interest rate with that lender,” said Rod Griffin, senior director of consumer education at Experian. “When you consolidate a student loan, you can have multiple student loans and you work with a lender to get a single loan that pays them all off by combining them into one loan that you pay back over time. ”
Let’s take a look at two scenarios. Imagine you have private loans and want a lower monthly payment. Refinancing with a private lender may be your best option, as you’ll likely save money by getting a lower interest rate now when rates are at historic lows.
But what if you have multiple federal student loans? You may want to consolidate them into one federal loan, leaving you eligible for federal programs such as income-based repayment plans or loan forgiveness.
Let’s take a look at Paul’s riddle. Paul is an NBC News10 viewer. He sent me an email that said in part: “Recently I requested a debrief on how my (student loan) payments were applied … Over a period of 2 years, all of my payments have gone into interest, and nothing has gone into principal. “
It’s called a negative amortization loan, and it’s bad. This is when your minimum monthly payment is not enough to pay off the principal, only the interest. You therefore do not repay any of the original debt. So, should Paul refinance the loan to get a lower interest rate and lower monthly payments? Was his loan officer wrong? This is something that I will investigate. I’ll keep you posted.
If you have any problems with your loan manager, you can contact the CFPB – Office of the Student Loans Ombudsman, the US Department of Education / Federal Student Aid, the National Center for Consumer Law, the New York Attorney General or your state attorney general, or the New York Department of Education.
The federally guaranteed loans offer a number of loan relief options. Click here to learn more about them.