Susan E. Thomas CPA
Can I refinance my student loans?

Yes, but only with a private loan. There is no federal refinancing option for student loans, meaning that you can't refinance federal or private student loans into a federal loan. However, you may be able to refinance your federal student loans and/or private loans into a new private loan. Generally, when you refinance a loan your interest rate may decrease, depending in part on market rates and your credit score. A lower interest rate is typically the main reason why borrowers attempt to refinance their loans. An online calculator can show you how much interest you'll pay over the life of the loan at different interest rates.

Keep in mind that if you refinance your student loans, your old loans will go away and you will be bound by the terms and conditions of your new private loan. If you had federal student loans, this means you will lose any income-based repayment options that might have been available to you because private loans generally don't offer this type of repayment option.

If you have federal student loans and you don't want to lose any potential repayment options, or if you can't find a suitable private loan to refinance, you might consider another option: federal loan consolidation. The federal government specifically offers a consolidation loan tailored to student loan borrowers. Loan consolidation is different from loan refinancing, even though under both options you replace your old loans with a new loan. With federal loan consolidation, your interest rate will not decrease, but you will have a single lender (the U.S. Department of Education) and a single monthly payment. To be eligible for federal loan consolidation, you must have at least one federal student loan in repayment, grace period, deferment, or default status. The interest rate on a federal consolidation loan is fixed for the life of the loan and based on the weighted average of the interest rates of the loans being consolidated, rounded up to the nearest one-eighth of a percent (0.125%), with a maximum rate of 8.25%.

Borrowers who opt for a federal consolidation loan can choose from various repayment options to pay their new consolidation loan, including income-based repayment, extended repayment, and graduated repayment. If you choose the refinancing route instead and replace your federal loans with a new private loan, keep in mind that you won't be able to consolidate the loan back into a federal student loan to get these repayment options.

Finally, you might consider other refinancing options, such as a home equity loan or a loan against your 401(k) plan. However, you should carefully explore the advantages and disadvantages of these options before pursuing them.

Prepared by Broadridge Investor Communication Solutions, Inc, Copyright 2011