Student Loan Refinancing and Consolidation: What You Should Consider
Let's face it, life after graduation can get very expensive. Living expenses like housing, car payments, and relocation costs can be overwhelming when student loan bills are added on top of your existing financial obligations.
Student loan consolidation or refinancing can help you manage your budget. You'll save the frustration of dealing with multiple lenders and reduce the risk of missing a payment because you can combine your loans into a single loan, with a single bill.
Federal vs. Private Student Loan Consolidation
Should I Refinance My Student Loans or Consolidate?
How You Can Benefit From Student Loan Refinancing
What are the Pros and Cons of Refinancing Student Loans?
Which Loans are Eligible for Student Loan Refinancing?
How to Compare Student Loan Refinance Lenders
Federal Student Loan Consolidation
What are the Pros and Cons of Federal Student Loan Consolidation
Which Loans are Eligible for a Direct Consolidation Loan?
Federal vs. Private Student Loan Consolidation
There are two types of student loan debt restructuring: federal Direct Consolidation Loan and refinancing your student loans with a private lender.
A Direct Consolidation Loan can consolidate (generally two or more) federal student loans including federal parent loans. This type of consolidation is available for federal student loans only. No private loans, state loans, or institutional loans can be included.
A private refinance loan—sometimes called private student loan consolidation—can refinance both federal student loans (including Parent PLUS Loans) and non-federal student loans from private financial institutions (such as banks and credit unions) as well as loans financed by states or colleges/universities.
With either option, you can combine several loans into one. Although private student loan refinancing will allow you to refinance just one loan.
The reasons you should consider consolidating or refinancing your loans have as much to do with financial factors as they do with non-monetary concerns. Your monthly budget may be extremely tight, your interest rates may be higher than current market rates, and you could be missing an opportunity to save on the total amount of interest repaid by locking in a lower APR and choosing the right repayment terms.
At the same time you may be experiencing additional stress if you are shelling out so much money each month on your student loan payments that it affects your ability to make ends meet and save for the future, including limiting your ability to contribute to your retirement savings.
The bottom line is there are a lot of variables in play that may influence your decision to consolidate or refinance. If you’re looking to take control of your financial future, once you know why you want to consolidate or refinance, it’s best to get a thorough understanding of your options.
Should I Refinance My Student Loans or Consolidate?
You have a lot of flexibility when it comes to choosing how you want to treat your loans. You may want to consolidate your federal student loans with the federal program, and refinance your private loans with a private lender. Or you may want to include some or all federal student loans in a private student loan refinance.
Whether you are consolidating or refinancing, you are not required to include all of your loans. However, note that while federal student loans can be included in private student loan refinancing, private student loans can never be included in a Direct Consolidation Loan (the federal program is for federal loans only).
Note: If your goal is to reduce the number of bills you need to keep track of each month, the more loans you combine, the fewer monthly bills you will have. With either option, you are not required to include all of your loans.
Private Student Loan Refinancing
How you can benefit from student loan refinancing:
-
Take some pressure off your budget with a lower monthly payment
Those first student loan bills can swallow your income quickly, especially when you’re just getting started in your career. By refinancing you may be able to choose a longer repayment plan which may give you more affordable monthly payments. And that can help you stay current and avoid default. Plus, you can use the savings to pay off high-interest debts, like credit cards, build an emergency expense fund, or start contributing to your retirement savings.
-
Choose from flexible interest rates and repayment terms
Many private student loan lenders offer fixed or variable interest rates based on today’s competitive market rates. The rate you typically qualify for is commensurate with your employment history and credit score. If you pay your loans off within the original timeline, but with a lower APR, you will save on interest and pay less over the life of your loan.
If your goal is to pay less each month and you’re ok with extending your repayment term (which may increase the amount you pay over the life of the loan), most private lenders offer a variety of repayment terms to choose from, depending on your loan balance. When you can afford to pay more than your monthly payment, you can do so at any time with no prepayment penalties.
Note: Applying with a creditworthy cosigner may help you qualify for a lower interest rate and better loan terms.
-
Simplify your finances with a single monthly student loan bill and a single lender of your choice
Many students take out several types of loans to pay for college. You might leave college with loans from the federal government, your college and a few different private lenders. Keeping track of multiple due dates and payments can be tough. Refinancing combines your loans, giving you far less to keep track of. Another added benefit, you can choose the lender you want to work with.
What are the Pros and Cons of Refinancing Student Loans?
Student Loan Refinancing Pros
- Potentially qualify for a lower interest rate
- May reduce monthly student loan payments by increasing the length of your repayment period
- Combine both federal and private loans together
- Many lenders do not charge origination fees
- You may be able to transfer Parent PLUS Loans from the parent’s name to the student’s name (subject to credit qualifications of the student)
- You may be offered an additional interest rate reduction for setting up automatic payments, or by having other accounts with that lender (such as checking or savings)
- You may be able to combine your student loans with those of your spouse.
Note: Benefits vary by lender. Easily compare benefits on our Compare Lenders page.
Student Loan Refinancing Cons
- All benefits associated with your federal student loans will be forfeited, such as repayment plans, forgiveness and discharge benefits
- If the repayment term is extended, overall loan costs may increase
- A creditworthy cosigner may be required to qualify for the lowest interest rates
- If you are a servicemember on active duty and you refinance your student loans while serving, you will no longer qualify for an interest rate reduction under the Servicemember Civil Relief Act (SCRA) for student loans taken out prior to your active duty service
Which Loans are Eligible for Student Loan Refinancing?
✔ Private student loans
✔ Private parent loans
✔ Direct Subsidized Loans (sometimes called Subsidized Stafford Loans)
✔ Direct Unsubsidized Loans (sometimes called Unsubsidized Stafford Loans)
✔ Grad PLUS Loans
✔ Parent PLUS Loans (also eligible for child to include in their refinance)
✔ Perkins Loans
✔ Federal Family Education Loans (FFELP)
✔ Existing federal consolidation loans
How to Compare Student Loan Refinance Lenders
The features and benefits you want to compare will depend on your overall goal for refinancing. Some items to look at when comparing lender options are:
Interest Rates
- Are the latest advertised rates for refinancing better than your current APR?
- Does the lender offer variable and fixed rates?
- Can you get a better rate with a cosigner?
Repayment Terms
- What repayment terms are available? (Most lenders offer terms between 5 and 20 years, actual terms vary from lender to lender.)
- Does the lender offer any type of forbearance during periods of hardship, such as unemployment?
- Will your refinanced loan be forgiven in the event of death?
Loan Fees
- Does the lender charge an origination or application fee?
- What about late fees during repayment?
Other Benefits
Federal Student Loan Consolidation
When it comes to the Federal Direct Consolidation Loan you are generally required to combine two or more eligible federal student loans into a new Direct Consolidation Loan. This program is managed by the U.S. Department of Education. Rather than being based on competitive market rates, when you consolidate, your new interest rate will be based on the weighted average interest rate of all of the loans you are consolidating. This means, your interest rate will remain essentially unchanged. However, you may retain many of the benefits that come with federal student loans such as income-based repayment, and generous deferment and forbearance periods.
What are the Pros and Cons of Student Loan Consolidation?
Student Loan Consolidation Pros
- May reduce the amount of your monthly student loan payments by increasing the length of your repayment period
- Simplify repayment with a single loan instead of multiple loans
- May qualify to renew eligibility for deferment and forbearance benefits
- Multiple payment plans (including income-based repayment for some borrowers)
Student Loan Consolidation Cons
- Total cost of loans could increase if the repayment period is extended
- Potential loss of borrower benefits offered with the original federal loans, for example, a Perkins loan will lose its subsidized loan status and cancellation benefits. And if you were making payments towards Public Service Loan Forgiveness, you will be restarting the clock on your qualifying payments
- The remaining grace period on the existing loans will be lost if they are consolidated before the end of the grace period
- Your interest rate will remain roughly the same – it will not go down
- If you are a servicemember on active duty and you consolidate your student loans while serving, you will no longer qualify for an interest rate reduction under the Servicemember Civil Relief Act (SCRA) for student loans taken out prior to your active duty service
Which Student Loans are Eligible for a Direct Consolidation Loan?
✔ Direct Subsidized Loans (sometimes called Subsidized Stafford Loans)
✔ Direct Unsubsidized Loans (sometimes called Unsubsidized Stafford Loans)
✔ Grad PLUS Loans
✔ Parent PLUS Loans
✔ Perkins Loans
✔ Existing federal consolidation loans (in some cases)
✔ Federal Family Education Loans (FFELP)