Types of Loans and their Refinance Options

Understanding your Debt and Options

If you have received loans from multiple sources throughout your college career, then consolidation may get a little trickier than you think – especially if you have borrowed from both Federal and private sources in order to fund your education. Federal student loans and private student loans can be consolidated separately, but never together unless you are self-managing the consolidation with a lump-sum payment made by a company to you to pay off all your debts. Typically, however, in order to avoid the human tendency to not always do the things that are expedient (like paying off debts when you receive a large sum of cash), consolidation companies will make the payments to your lenders directly themselves once they have agreed to consolidate your loans.

The following are the most common loan types and the types of loan options you may have for consolidating them:

Federal Student Loans

By far the most common type of student loan, Federal student loans are offered by the government through the Free Application for Student Aid (FAFSA) available online or through your school’s Financial Aid office. Federal financial aid is awarded, not based on your credit score or credit history, but rather your income amount, and the lower your income the more eligible you are to receive Federal assistance. Federal Stafford and Perkins loans are the most common type and come in two distinct flavors – subsidized and unsubsidized.

Subsidized loans do not accrue interest for as long as you are in school, making repayment much easier to manage once you graduate since you will avoid years of interest having built up against you.
Unsubsidized loans begin to accrue interest from the moment you receive the money, even though the loan does not have to be repaid until you graduate from school or drop out/drop below part-time attendance. This means that by the time you finish your education you could owe significantly more than you actually borrowed.

Federal student loans are consolidated through Federal consolidation loans which generally keeps the money “in the family”, but allows students the option of combining many federal loans into one simple payment. Your interest rate for the consolidation loan will be determined by an average of the rates of all of your loans plus another minor calculation at the time that you fill out the application for the loan.

Private Student Loans

Private student loans are loans made by a private lending institution such as a credit card or a bank. They operate in much the same manner as Federal student loans do in that they can be either subsidized or unsubsidized. One significant difference between a Federal student loan, however and a private loan, is that the private loans are given out based almost entirely upon your credit record (or the record of your parents, if they are applying for you), and you may be refused a loan if your credit score is not sufficiently high enough. Repayment options for private student loans include:

Graduated Repayments will allow you to make payments on your loan that start off small for a year or two and then gradually increase over time. This loan option is best for those who can expect to make a significant living in the future but may have to start off as an intern or in another entry-level position for awhile in order to prove themselves.
Extended Repayments are consolidated loans that extend the repayment time allowed beyond the standard 10 years for a student loan. Extended loans can allow repayment for as long as 30 years depending on the size of your loans. Usually the longest repayment terms are reserved for those whose degrees required 8 years of schooling or more such as doctors and lawyers, who may build up student loan debt in excess of $100,000. The main downside to this type of loan repayment is the higher amount of interest that must be paid over time.
Income-Based Repayments are payments that are based upon how much you make in a year. Typically borrowers who get on this type of plan have to pay a certain flat amount each month (very small) in addition to a percentage (2-5%) of their monthly income to the debt. This lasts as long as it takes in order to pay off the debt. Not all lenders offer this type of repayment option and you will want to review carefully the terms, fees and possible penalties associated with it before you sign.