After a flurry of parties, job applications, and saying goodbye to the college life, the road ahead for many graduates is unknown. Your first job out of college may not be the dream job you have been hoping for – in fact, it can be the opposite. Many recent graduates will take a position they may not really want for one reason – student loans. Here’s what new grads from undergraduate and advanced degree programs need to know about refinancing their student loans.
While student loan refinancing isn’t usually an option for recent graduates of undergrad programs due to eligibility guidelines, there are still steps you can take now to be ready to lower your interest rate when it’s time. Most lenders, PenFed included, require you to be employed before refinancing. You also need a qualifying credit score—an excellent score can also help you secure a better rate.
Consolidation and refinancing are often used interchangeably, but they don’t mean the same thing. Refinancing has a goal of getting a lower interest rate and more favorable terms on all of your student loan payments, both federal and private. Federal loans can be refinanced through a private lender, but you will lose federal benefits once you refinance. Review the federal benefits before refinancing and decide if you’re able to proceed without them. If you have a steady income, don’t have trouble making payments, and aren’t on a public service forgiveness program, then refinancing is most likely the best fit for you.
Consolidation is a little different—it’s simply putting all your loans on one monthly payment to simplify paying back your loans. Your interest rate is determined by the weighted average rate of all loans being consolidated. Federal consolidation is free and can be done directly on the federal website. Make sure you go directly through the federal website as there are a lot of scams targeting federal loan borrowers.
After graduating, know what you owe before the first bill comes due. Gather your loan statements and review the interest rates, payment due dates and minimum payment amounts. Once you get your first job, you will be able to budget your payments—but it starts with knowing what you owe. Whenever possible, pay more than the minimum payment, if your lender doesn’t have prepayment penalties. The more you pay over the minimum, the more you will save in the long run on interest costs and will have the added benefit of paying off your loans faster.
While paying off your loans quickly will save you the most money on interest costs, you don’t want to sacrifice an emergency fund or retirement savings. It’s important to make sure you are balancing both paying off debt and saving for the future. Saving for retirement in your early 20’s will allow your money more time to grow and greatly improve your ability to retire on time.
If you do want to refinance in a few years, it’s important to get your debt-to-income ratio (DTI) as low as possible. A common reason PenFed applicants are denied is due to a high DTI. Focus on paying down credit card and other debt to improve your credit score, get a lower interest rate and improve your chances of getting approved for refinancing.
You may have a cosigner on your loan now, but it’s possible you won’t want one later. If you decide to refinance with PenFed, after one year of consecutive on time payments you can apply to release your cosigner and become the sole borrower on the loan. A cosigner will get you a lower interest rate if they have a higher credit score – if not, you may be happier refinancing on your own. It’s important for you and your cosigner to know that you are both held responsible for the loan. This means if you miss a payment, your cosigner’s credit will also take a hit.
To prepare for refinancing, focus on lowering credit card debt, making payments on time, and doing what you can to raise your credit score. This will ensure you get a great rate and will be ready to shorten your loan term to get out of debt faster once it’s time to refinance your student loans.