More and more financially savvy students are looking into ways of refinancing or consolidating their student loans while they are still students.
The logic behind such a move is pretty obvious. The sooner you can lock in a lower interest rate or more favorable terms, the better off you will be in the long run.
Unfortunately, market conditions make this approach nearly impossible.
Lenders are careful
Numerous lenders are advertising student loan consolidation interest rates below 3%, with many under 2%. What they are not advertising is what their target borrower looks like.
Most of these companies are after newly minted lawyers, doctors, and MBAs. They want young people with a lot of debt, but very high credit scores and incomes. They target these groups because they are relatively safe bets.
The problem with consolidating during school is that students are not as safe of a bet. Regardless of how good your grades are or how prestigious your school is, consider two potential borrowers: one is two years out of medical school, earning a decent income with very high job security and earning potential; borrower number two is currently a student.
If you are still a student, there are a number of risks that a lender would have to accept. Not all students graduate. Not all students get jobs. Not all students earn enough money to keep up with their debt. Some people graduate, start businesses, and end up not making any real money for years. From a financial perspective, a student represents a dangerous investment.
As a result of the risk, most lenders require potential consolidators to be graduated and to be able to prove a stable income.
The time to consolidate
The best time to consolidate is when you can secure the lowest interest rate. Right now interest rates are very low, so there is definitely and advantage to consolidating as soon as possible.
Unfortunately, there are many factors beyond the market that must be considered. If you get a big promotion at work, or pay off a car loan, your application for refinancing improves. The better your individual application, the lower a rate you will get. Put another way, waiting until you have a job may be to your benefit.
A quick word about co-signers
Some of you may be wondering about whether or not having a co-signer on your loan makes a difference. If mom is willing to co-sign and she a great credit score and huge income, why wait to consolidate?
There are two reasons to not go with this approach. First, most lenders still require borrowers to be graduated and in a job. Regardless of how good your co-signer’s credit may be, there are some initial hurdles that must be met first.
Secondly, co-signing on a loan, especially a large student loan consolidation, is a huge financial commitment and risk. There are a ton of things that a potential co-signer needs to consider before going this route. In most cases, we would recommend that a co-signer not get involved in the student loan consolidation process.
The Bottom Line
If you are a student thinking about refinancing your student loans, pat yourself on the back. You are being proactive in addressing an issue that many of your peers ignore to their detriment.
The best thing a student can do while still enrolled in school would be to pay down their debt as much as possible. As those loans sit, the interest continues to grow. A little bit now will make a big difference in the future. Once school is done and you have gotten a job, it will be time to revisit the student loan consolidation options.