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But what if you consolidated back when rates were higher and you're kicking yourself? You can't consolidate again unless you have a new student loan to add to the mix, and even then you wouldn't change the rate on the loans that have already been consolidated.
Or perhaps you're worried that the interest rate on your private student loan could spiral, and you're looking for options to fix or at least lower the rate you pay.
Here are some options, along with the pros and cons:
Using a 401(k) loan. Most 401(k) plans allow you to borrow up to half your balance or $50,000, whichever is less. The interest rate is low -- typically the prime rate (currently 5%) plus 1 percentage point.
But there's a huge risk: If you lose your job, you typically have to pay back the loan within a few weeks, or the unpaid balance becomes a withdrawal. That's a financial disaster. You'll pay taxes and penalties on the money, but worst of all, you'll lose the future tax-deferred returns you could have had. Figure every $10,000 withdrawn prematurely from a 401(k) costs you $100,000 in lost retirement income, based on an 8% average annual return over 30 years.
There are other disadvantages. Though student-loan interest is typically tax-deductible, interest on 401(k) loans is not. Also, you don't have as many options for repayment; loans usually have to be paid off in five years, and you can't get deferrals or forbearance if you run into a financial crunch.
The bottom line: It's not a good option for most borrowers.
Using a home-equity loan or line of credit. If you have lots of equity in your home, you can lock in a fixed rate of about 8% on a home-equity loan if you have good credit. That won't save you much (if anything) with federal loans but could save you money on private loans. Rates on home-equity lines of credit are much lower -- around 5% with good credit -- but are variable and can climb as high as 18%.
Most home-equity lines of credit have 20-year terms and 10-year draw periods. That means you can borrow money against a credit line for 10 years, making interest-only payments. At that point, you can no longer tap the line and must start making principal-and-interest payments for the final 10 years. Home-equity loans, by contrast, require principal-and-interest payments over 20 years.
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Either way, you might wind up paying more in interest than if you'd buckled down and paid off the student loans over 10 years. Plus, once again, you lose the flexibility of your federal loans, which allow you to skip or trim payments based on your economic circumstances. Fail to pay your home-equity loan or line of credit and you could lose your house.
The bottom line: It's not a good idea for most, but it could work for those with high-rate private loans who can make the payments.
The "rich relative" refinance. This could be a win-win if you're a responsible borrower and your relative is looking for a higher yield on her savings. She pays off your debt, and you pay her an agreed-upon rate of interest. If you're paying 8% on your student loans now, you might offer 5% to 7%.
You can talk to a tax pro to arrange the details or use Virgin Money, a site that coordinates personal "friends and family" loans. As with 401(k) or home-equity borrowing, you lose the flexibility of your federal loans. You also can't deduct the interest.
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College Financing 101When things get expensive, the cheap get creative. And there aren't many things more expensive than a college education. Here's a lesson on ways to save 20% or more.
Prepay with a vengeance. If your student loan rate is low and fixed, there's no real reason to pay the money back in a hurry. You're better off investing that money in your retirement plan or other savings. If your rates are high and variable, though, the best option may be to throw every spare dime at the debt to pay it off in a hurry. You still want to save for retirement (preferably 10% or more of your gross income, or at least enough to get the full company match) and pay off any credit card debt.
After that, though, your next priority should be retiring troublesome student loan debt. If you need ideas for how to free up more money to pay off your debt, check out MSN Money's Smart Spending blog.
Liz Pulliam Weston's latest book, "Easy Money: How to Simplify Your Finances and Get What You Want Out of Life," is now available. Columns by Weston, the Web's most-read personal-finance writer and winner of the 2007 Clarion Award for online journalism, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.
Updated July 3, 2008
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