“Funding Nemo: A Pixar movie about Marlin trying to put his son through fish college.”
– Twitter joke seen on Buzzfeed.com

No one told Heather Jarvis she couldn’t afford to go to Duke University, even though her modestly paid executive assistant mother and often-unemployed Shakespearean actor father couldn’t afford the tuition. She “charged it” to student loans and graduated several years later from Duke’s School of Law with honors… and a $125,000 bill. This is financial planning for college at its worst. (Learn how to finance your own education with our Ultimate Guide to Financial Planning Myths.)

Facing 30 years’ worth of $1,200/month payments and with a dream of becoming a lowly-paid public defender, Heather was in a quandary. Should she abandon her dream of standing up for those facing criminal prosecution, or just take the highest-paying job available?

Fortunately, Heather found a solution in Duke Law’s generous loan repayment assistance program. As mentioned in Part One of this article, student loan forgiveness, and assistance programs help graduates willing to pursue (even for a time) public interest law and other non-profit and public service occupations including teaching, serving in the military and working for a police or fire department.

After practicing law for more than a dozen years, Jarvis turned her advocacy focus to making college affordable for students pursuing the public good. Now an expert on student loans, Heather educates students through speeches and online resources and has even worked with members of Congress to contribute to student debt relief policy.

Should You Consolidate or Refinance Student Loans?

Want to get a lower rate and a lower payment by consolidating or refinancing your student loans? Not so fast! You may make a mistake you can’t undo.

Consolidation means combining several loans into one. Refinancing implies seeking a lower rate, although often several loans are also consolidated in a refinance. While simplifying and seeking a lower rate sounds great, there are some critical issues to consider, and reasons why you might decide NOT to refinance or consolidate your loans!

While the specifics can vary, one simple rule of thumb is that you must exercise extreme caution when refinancing FEDERAL loans. You can (and in many cases, should!) consolidate federal student loans into a Federal Direct Loan (more on that in a moment). But you might regret refinancing federal loans into a private loan, even if the rate is lower.

As Jarvis says on her blog, “Private loans come with significant risks. Private loan contracts are carefully drafted to benefit banks and investors; they are not designed to provide flexibility for students and families. Federal student loans have unique consumer protections….”

The Pros and Cons of Refinancing Student Loans

These are some of the important benefits that you may LOSE if you roll your federal loans into a new private loan:

Forget about Forgiveness. Federal forgiveness and repayment plans may slash many thousands of dollars or several years off of your repayment. You’d want to thoroughly research if you might qualify for such programs before you consider refinancing.

Payment negotiation and flexibility. In addition to income-based repayment plans, federal student loans can be deferred in many situations, such as:

• a return to college
• a period of unemployment, or
• military service deployment.

Also, a forbearance may be granted for financial hardship or illness.

Disability Discharge: If you become totally disabled, you can apply for a total and permanent discharge (TPD) of your federal student loans so that you would not have to repay your loans.

The debt may not die when you do. Federal student loans are discharged when the borrower dies, but most private student loan companies don’t offer the same benefit. That means that a bank can go after your estate for payment. And while you might laugh and think at 24-years old, “What estate!?” ten years down the road, you may have a house, a family, and assets that could have been protected.

With Parent PLUS loans, it’s the parent — not the student — who is legally obligated to repay the loan. According to student loan lawyer Jay Fleischman of Consumer Help Central, “These loans can be discharged when either the parent or the student dies. Discharged federal student loan obligations won’t pass to your estate, and your heirs won’t have to pay them off.”

The bottom line: once dollars are removed from a federal student loan, they can’t be put back! So when you refinance or consolidate your loans using private financing from a bank or credit union, you lose options, flexibility and control.

Still, it can make sense to refinance or consolidate. If you took out both federal and private loans during the course of your education, one sensible strategy might be to consolidate your federal loans into a Federal Direct loan, while consolidating your private loans into a new, lower-interest option.

If you are considering applying for consolidation and want to make sure that your federal loans are not included, go to the federal student loan database. There you will be able to pull up a full list of your federal loans. If the loan is not on the list, it is a private loan.

Student Loan Consolidation and Refinance Options

Federal Direct Loans: If you have numerous federal loans and wish to simplify through consolidation, you can apply for a Federal Direct Consolidation Loan. You’ll retain most of the advantages of your original federal loans, such as the ability to defer payments in certain situations.

As a matter of fact, you may HAVE to consolidate your loans into a Federal Direct Loan in order to access important potential benefits, such as Public Service Loan Forgiveness. Even if you do not qualify for a student loan forgiveness program, there are multiple and flexible repayment plans available with a Direct loan. For more information on a Federal Direct Loan consolidation and links to the repayment plans, see the student aid website here.

Private Lender Options: Private lenders can both consolidate and refinance existing loans, sometimes with significant savings. In the last few years, some innovative new lenders have surfaced, including some start-ups created by recently graduated students looking to solve the problem of student loan debt for themselves and others! These are a few of the resources we ran across that were the most highly and often recommended, but of course, do your own due diligence.

CommonBond is a tech-enabled lender created by a few Wharton MBA students who wanted to simplify the process of refinancing student loans and make it more affordable.  Today, it is a leading student lender with extremely competitive rates, currently from 3.37% to 6.74% for fixed rates, depending on credit and length of loan term. (You’ll see even lower rates advertised, which are typically variable rates which we don’t generally suggest, as they can turn a low teaser rate into a higher rate down the road.)

Low rates can mean big savings over time. According to their website, the average borrower will save just over $24,000 over the life of a loan. Commonbond also has some innovative products, such as the “no co-sign MBA loan,” beginning at a rate of 6.23% APR.

The company also has a unique “social promise” to use their profits from their US loans to support education in Ghana through Pencils of Promise.  “Business can and should have a positive impact on social change,” Commonbond founder David Klein.

Commonbond also takes seriously a social promise to their own members by offering an important benefit. Commonbond offers the CommonBridge program to help borrowers who lose their job find a new one. Klein believes it’s smart to invest in your customers rather than send them to collections, a wonderful approach.

SoFi (short for Social Finance), is an online bank originally created by a group of Stanford business students who wanted to help other business students.  Alumni invested in the program, and the funds were used to help recent grads lower their interest rates.

Like Commonbond, SoFi has great rates, but according to Bloomberg.com, SoFi has taken a hit because of higher than anticipated default rates, with even six-figure earners defaulting on loans. In response, SoFi tightened up lending standards, so expect to qualify only if you have good credit and a healthy income.

Also similar to Commonbond, SoFi offers borrowers a significant advantage in their career planning and job search program.  According to StudentLoanSherpa.com, SoFi hired the former Assistant Dean for Career Services at a top MBA school to lead its career services division. (We love the win-win solutions offered by these innovative lending leaders!)

Credible.com delivers personalized offers from multiple lenders to qualifying applicants within minutes. Another helpful resource for those who do want to refinance or consolidate is Credible.com. Credible lets borrowers find the best lender by filling out one form and receiving personalized offers from multiple lenders within minutes. Credible.com doesn’t charge a fee and they only work with legitimate local credit unions and banks that can provide excellent rates.

If you would like refinance offers, use our referral link to receive a cash bonus. However, make sure you read this entire article and think twice (at least!) before you consolidate any federal loans!

Student Loan Scams to Avoid

Unfortunately, not all lenders are reputable and many don’t serve the best interests of the student. There are even some shameless “take the money and run” scams out there.

In general, you want to avoid:

• Any situation where you are asked to pay money in order to get money
• Any company that promises immediate student loan debt relief, cancellation or forgiveness of default
• For-profit “student aid” companies that charge unnecessary fees for information or services available elsewhere for free
• Debt settlement companies or law firms who claim they can settle your student loan debt after you default on your loans… while paying them While these firms are sometimes effective with other types of debt, they do not have the ability to negotiate with Federal student loan creditors to get you a better deal, according to student debt expert Robert Farrington.

Here are some things to look for when applying for a loan that you’d expect to find from a reputable lender:

• No application fee
• No origination fee
• No “consolidation fee”
• No upfront fee for counselors who will “find you the best rate”
• No prepayment penalty for paying off loan early

Also, check the fine print to see if the co-signer would be responsible in case of an untimely death of the student. The best lenders (such as Commonbond) will discharge a loan in that situation.

Getting the Best Interest Rate from a Private Lender

While many federal programs don’t use your credit score for qualifying purposes, private loans are another matter. You’ll also want to make sure your credit score is the best it can be to receive the most competitive rate! Three simple ways to raise your score include:

• get and stay current on payments
• don’t apply for new credit for at least 90+ days, and
• keep your balances to 30% or less of your available credit on credit cards or credit lines.

You can monitor your credit score through a service such as CreditKarma.com which provides your TransUnion score and gives you suggestions of how you can raise your score based on your credit history.

Resources for Students and Parents

If you have a federal student loan, you consolidate it yourself without fees at StudentLoans.gov, the website run by the US Department of Education to help students manage debt.

On the site, you can learn more about the different types of student loan forgiveness programs, change your student loan repayment plan, or apply for student loan consolidation.

There is also an excellent resource for consolidation options at StudentAid.ed.gov. And you’ll find helpful information for students on the Consumer Finance Protection Bureau website.

For further information on student loans and affordable ways to finance a college education, see Heather Jarvis’s website at AskHeatherJarvis.com. There you’ll find a student loan discussion forum, an extensive list of tools and resources, and a blog with articles on:

• Income-driven repayment plans (IDR) Revised Pay-As-You-Earn programs (REPAYE) and other loan repayment assistance programs
• Public Student Loan Forgiveness
• Private student loans, and
• Funding higher education programs.

What Are YOUR Secrets for Saving on Student Loans?

We learned so much in researching this article, and we hope that we’ve given you some ideas of what to do – or what to avoid – as you seek to save on your student loans.

Have you refinanced student loan debt or used other solutions to slash your educational debt? Please share with US what is working for YOU in the comments below!

And as always, if we can help you save more, enjoy more cash flow, and avoid Wall Street risks, we look forward to hearing from you.

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