Q. Student loan rates for borrowing are at an all-time low. Is there a company that will refinance student loan debt at a fixed rate? We have not missed a payment in three years, but I'm fearful that future rate bumps will send the interest through the roof.
A. Consolidating student loan debt was common before the 2008 financial crisis. Since then, we have been in a tight credit market with fewer options for consolidating. However, things are beginning to loosen up — especially for those with excellent to good credit ratings.
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You're wise to make sure you're not in danger of defaulting on your student loan. Because you have a variable rate, you more than likely have private student loans as opposed to federal loans. However, if you have an older variable-rate federal loan, you can consolidate and lock in a fixed rate. To find out more, contact the Federal Direct Consolidation Loans center at (800) 557-7392. The center's website has more information and a calculator to help you find out how much you'll pay each month if you consolidate.
Lenders can make staggering changes to your loan agreement if they consider you in default, for reasons that don't have to be tied to your payment history. They can raise interest rates and charge excessive fees. Plus, there is no regulatory limit on interest rates for private student loans. And if your credit rating slides enough, your rates can be raised just like in the bad old days of credit card universal default. You don't want to mess with these bad boys because they're protected by rules that make them virtually nondischargeable in bankruptcy; they have onerous collection options — like taking your tax refunds or Social Security payments, or voiding your license to practice in some professions.
It's a good idea to consolidate your current loans into one fixed-rate loan with a monthly payment that you feel you can afford. However, beware of extending your loan for too many years. A consolidation loan product payable over 25 years, even with a low interest rate, will probably cost you a bundle in interest charges, though it may help you avoid a default.
Tell one of your current lenders you are interested in a fixed-rate loan and the loan amount you would need to consolidate. Next, find out what options you have with your bank or credit union. If you can, consolidate into something other than a student loan — at a comparable interest rate and reasonable payment level. Be sure to comparison shop for the best deal with the best terms.
If your credit is less than stellar or you have what is called a thin file — one with little data, making it hard to score — take time to improve it.
Look into paying off the loans as quickly as possible.
I'm concerned about the lenders' unwarranted, unfair protections if anything causes you to default, like losing your job.
The same concerns apply if you have a co-signer on the account — and if you die, the co-signer still has to pay the bill.
Steve Bucci is author of ?Credit Repair Kit for Dummies? and a personal finance coach.
debtadviser@bankrate.com
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