For students who borrow to attend college, the average debt at graduation is $28,500, according to the College Board. And that’s before interest that accrues over years while the loan is in repayment.
If you’re a graduate overwhelmed by education debt, there are ways to make the loan burden more manageable.
You can consolidate federal (but not private) loans to combine them into one new loan. But the interest rate of this new loan will be the weighted average of the interest rates of the debts you combine, meaning you won’t save money on interest. If you go this route, consider excluding your highest-rate loan and targeting that one for early repayment.
To lower your rate, you’ll have to turn to a private lender.
That’s what Teresa Ruiz Decker, a communications consultant in Santa Cruz, Calif., did. Decker used federal loans to help finance her undergraduate and master’s degrees, ending up with $54,000 in debt. After graduate school, she combined all of her loans into one direct consolidation loan, but grew concerned when most of her payments were going toward interest and her balance climbed to $60,000.
“That was my wake-up call to take action,” she says.
Decker earned extra income through side jobs and as an Airbnb host to accelerate her payments. After her balance shrank, she refinanced her loans through a private lender. She snagged a variable rate of 3.29 percent, which she later converted to a fixed rate of 4.58 percent. Decker completed her final payment this past June.
“I didn’t want to be paying off loans when I sent my own kids to college,” she says.
If you turn to private loans, note that payments on an initially low variable rate will increase as rates rise. That may make sense if you plan to pay off the loan early. But with a fixed-rate loan, the payments will be more predictable.
Fixed-rate private loans from reputable lenders recently ranged from 5 percent to 15 percent, depending on the credit history and income of you or a cosigner; variable private loans hovered between 4 percent and 10 percent (and even higher) on StudentLoanHero.com, a website that offers student-loan management and repayment tools.
Also compare the term over which you’ll repay the debt.
“The majority of savings are due to a shorter repayment term rather than a lower interest rate,” says Mark Kantrowitz, publisher of Savingforcollege.com.
You can also shorten the repayment term by directing extra cash toward your student loans. Notify your loan servicer that each extra payment should be credited to principal; otherwise your servicer might, and sometimes must, treat the extra money as an early payment of your next installment.
To refinance with a private lender, you will likely need a credit score of at least 700 as well as a history of on-time payments to beat the rate you currently have, says Joe DePaulo, CEO of College Ave Student Loans, a private lender. You’ll typically lose such benefits as deferment and forbearance on your federal loans if you include them in the mix.
To compare options, visit www.studentloanhero.com or www.credible.com. Apply to multiple lenders and compare offers; the lowest advertised rates are reserved for borrowers with the strongest credit histories.
Miriam Cross is an associate editor at Kiplinger’s Personal Finance magazine. Send your questions and comments to email@example.com.