I’ve received several emails from readers asking if it was a good idea to consolidate or refinance their student loans while they are still in school.
While I applaud the initiative taken by these readers, their plan of action probably won’t work. In most cases, it isn’t possible to refinance or consolidate student loans for current students. Even if such a move were possible, it probably wouldn’t make sense to do it.
However, there are several things borrowers can do while they are still in school to lower student loan interest rates and ease the post-graduation student loan burden.
Refinancing is a Challenge for Current Students
Borrowers typically refinance so they can get lower interest rates on their student loans.
While refinancing during school might make sense to the borrower, it wouldn’t work for most refinance lenders.
The refinance business works because borrowers with a job and a degree are less risk than students in school. Refinance lenders can pay off old loans and offer a new loan at a lower interest rate because of the improved financial circumstances of the borrower.
Borrowers still in school usually don’t have a job. Even fewer have a degree. This combination means refinance applicants are likely to get rejected by the refinance lenders. Many refinance companies require a degree.
Federal Direct Consolidation Doesn’t Make Sense In School
Current students may be interested in federal direct consolidation to group their many federal student loans into a single loan. This motivation for consolidation can lead to mistakes. Even for graduates, consolidating federal loans simply to combine the loans can be a huge mistake.
Additionally, federal direct consolidation doesn’t actually lower interest rates like a refinance. When borrowers consolidate, the Department of Education calculates the weighted average interest rate of the old loans when creating the new consolidated loan.
The primary benefit of consolidation is to gain program eligibility. Consolidation can take loans that were not eligible for certain repayment plans or forgiveness programs and create a new loan that qualifies.
Current students are not able to benefit from eligibility changes because they may be getting new loans and because repayment has not yet started.
Planning ahead to consolidate is a good idea. Many borrowers will benefit from consolidating immediately after graduation. However, there isn’t a benefit to consolidating during school.
Current Students Can Gradually Convert Their Loans
Even though consolidation and refinance may not be an option for current students, there are still other opportunities to improve their student loan situation.
I’d even argue that the options for students in school are better than a traditional refinance or consolidation.
Getting Lower Interest Rates – The borrowers concerned about high-interest loans that they previously borrowed can pay down this debt while they are still in school. If a student works during the summer and makes $5,000, they may choose to use that money towards the tuition next fall. Instead, they can use that money to pay down the high-interest loan and borrow a new loan with better terms. Going this route effectively converts high-interest debt into lower-interest debt.
Converting Private Loans into Federal Loans – Most graduates realize that federal loans are way better than private loans, even if they have a slightly higher interest rate. Current students have the opportunity to convert private debt into federal student loans. Using the strategy previously described, borrowers can obtain new federal student loans and pay down less desirable private student loans.
Students may not have traditional refinance or consolidation opportunities available, but they can improve their student debt situation.
Refinance or Consolidate After School
When it comes to federal direct consolidation, the best time usually is right after finishing school. Many borrowers don’t realize it, but federal consolidation restarts the student loan forgiveness clock. Thus, if consolidation is necessary, it makes sense to do it before making any payments that might count as progress towards forgiveness.
On the refinance front, borrowers often can refinance shortly after school. Many lenders will accept a job offer letter as proof of income. As your financial circumstances improve, refinancing becomes more viable. The better your finances, the more appealing you will be to refinance lenders. Fortunately, borrowers can refinance multiple times. Each time your situation improves, you may be able to improve your student loan situation.