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Dear Liz: My son has taken out college loans. He graduated this year and the loans are coming due. I am surprised to see that the interest rates range from over 6% on the federal loan to 10% on the others. Is there a way to refinance this since home loans are at record lows under 4%?

Answer: Mortgages are secured by a piece of property that can be sold if the borrower fails to pay. Student loans are essentially unsecured, although collectors can pursue borrowers until they die since there is no statute of limitations on this debt.

The 6.8% rate on federal Stafford loans may seem high in this low-rate environment, but historically it’s a pretty good rate for an unsecured student loan. What’s more, the rate is fixed — unlike rates on private student loans, which are variable and can rise to 18% or more.

Your son probably won’t be able to find a lower rate unless you become his banker. If you’re financially able, you could pay off the loans and then charge him 4% or so to repay you.

Otherwise, he should focus on paying off his private student loans as quickly as possible, because of the risk that the rates will climb higher. To free up more cash, he should consider consolidating his federal loans to get a longer payback period — 15 or 30 years instead of the standard 10 years — and thus a lower monthly payment. If his income is low and the amount he owes is substantial, he also should investigate the income-based repayment option on his federal loans, which could further lower his required monthly payment.

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Categories : College, Q&A, Student Loans



Consolidating the student loans over a long time period does not free up cash to pay those same student loans.


Choosing a longer loan term for the federal loans will lower the payments on those, freeing up money to pay off the higher-rate (and riskier) private student loans more quickly. It’s similar to the tactic of paying the minimums on most of your credit cards so you can throw more cash at the highest-rate card. Once that’s paid off, you apply the same payment to the next highest-rate card, and so on.