The Basics of Student Loan Consolidation and Refinancing

By Elaine Rubin

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When you refinance (or consolidate) your student loans or parent loans, your current loans are paid off and replaced by one new loan. Depending on the amount you owe and the repayment plan you choose, your repayment term may be extended, which can result in a significantly lower payment. In general, a longer repayment term will increase the amount of interest you will pay during the term of the loan, but there is no penalty if you pay your loan off sooner or make additional loan payments along the way.

Reasons you might want to refinance student loans:

• Save money: If you qualify, you may be able to get a lower interest rate.
• Simplify your bills: Refinancing combines your student loans into a single loan with one payment.
• Improve your finances: Refinancing can reduce your monthly payment so you can afford to make the payment and use the money you save to pay off higher interest debts, like credit cards.
• Remove your cosigner: You may be able to release the cosigner (if you have one) from your existing loans by refinancing.
• Get better customer service: If you aren’t happy with your current lender, you can refinance your student loan with a different lender.

View My Student Loan Refinancing Options

Reasons you might not want to refinance student loans:

• Lose federal loan benefits: If you refinance your federal student loans into a private loan, you lose benefits such as your 3 years of deferment and forbearance, eligibility for certain loan forgiveness and discharge programs and government-paid interest during authorized deferment periods for any subsidized loans you may have.
• Spend more money: When you refinance, in most cases, your loan is typically paid back over a longer time period, increasing the total cost of the loan.
• Give up your grace period: If you refinance federal student loans before your grace period has ended, you have to start making payments right away.
• Lose benefits for military servicemembers: If you are a servicemember on active duty and you refinance or 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 service.

Two types of student loan consolidation

Direct Consolidation Loan

• Can ONLY include federal student loans, such as Direct Subsudized, Direct Unsubsidized, PLUS, and Perkins Loans
• The federal government is your lender
• Eligibility is not credit-based and your interest rate stays roughly the same as it currently is

Private student loan refinancing

• Can include BOTH federal loans and private loans; check with your lender to confirm
• The bank, credit union or financial institution that you choose is your lender
• Eligibility and interest rate are based on your credit and, if you have one, your cosigner’s credit, so it is possible for your rate to go down

What to do next?

Locate your student loans

Compare private student loan refinancing options