Interest rate savings

Question: I am fortunate to have paid off all of my undergrad loans, but have taken out significant loans for graduate school, which I just finished in December. My loans are all federal loans which are mostly at 6.7%, with a small amount at 8.9%.

I am just about to start paying back those loans, and was wondering -- are there any banks who would take on my school loans, and give me a lower interest rate? Liz, San Francisco, CA

Answer: I wouldn't recommend making the loan switch even if you could find a lower rate personal loan at a bank. Yes, a lower-rate bank loan would save you some money on interest rate payments, but in return you would be giving up a lot of financial flexibility.

For instance, if you decide to enter a low paying career or you end up making little money like so many graduates today you can pick a repayment option that reflects a low percentage of your income. Alternatively you can stretch out your payments if your finances take a turn for the worse. Under certain circumstances federal loans can be forgiven for graduates who go into teaching, health, public service, and a number of other service-oriented fields. These are only a few advantages of federal student loans.

The rate on your loans is pretty good, too. It won't be easy to find a bank loan that charges you less. For example, I quickly checked at bankrate.com on personal loans and the rates are higher than your student loan rates.

The one advantage to making the switch with the scenario you described--taking out a consumer loan to pay off your student loans and then pay off that loan--is that you could discharge the loan in bankruptcy in a financial pinch. You can't shed student loans in bankruptcy. I'd still opt for the repayment flexibility of the student loans.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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