How to Refinance (or Consolidate) Student Loans in 4 Simple Steps
So you want to combine your student loans to make repayment a little easier. You have two options, either consolidate or refinance your loans. You may not be sure which choice is best for you, so let’s go over how the two options differ.
Student Loan Consolidation vs Refinancing
Student loan consolidation allows you to combine (usually) two or more of your federal student loans into a new federal loan, known as a Direct Consolidation Loan. A Direct Consolidation loan will allow you to extend your repayment term (up to 30 years), but your overall interest rate will not be reduced. The new loan’s interest rate is determined by calculating the weighted average of the loans you are consolidating (rounded up to the nearest one-eighth of a percent). Your lender will remain the U.S. Department of Education.
In contrast, student loan refinancing allows you to combine private and/or federal student loans into a new loan, or just refinance one student loan, depending on your needs.
Refinancing may reduce your interest rate, monthly payment, or allow you to remove a cosigner. You have the option to choose your lender based on the loan which has the most beneficial terms for you.
Another important distinction between consolidation and refinancing pertains to Parent PLUS Loans. If you are parent with a Direct Parent PLUS loan, you may be able to consolidate that loan with other federal loans in your name, but if you want to transfer responsibility of the loan to your child, you’ll need to refinance with a private lender. This will require your child to apply for the refinance loan in his/her name—and on the merits of their own creditworthiness—with a lender such as PenFed Credit Union, CommonBond or Sofi.
4 Steps to Student Loan Refinance and Federal Student Loan Consolidation
Now that you’ve decided which option is best for you, it’s time to get started.
It takes a little bit of effort but the relief you feel may be well worth it. Keep it simple by following these four easy steps detailed below.
STEP 1: Locate My Student Loans
For each student loan you have, you'll need to have this information handy:
- loan type (e.g., Direct Subsidized, Direct Unsubsidized, PLUS, Perkins, private)
- loan balance
- loan payoff amounts
- loan statement from your lender or servicer
- name, address, and phone number of lender or servicer
- proof of citizenship
- driver’s license or passport number
- proof of income
You may need to contact your loan servicer(s) to find this information. Here’s how to find your loan servicers.
How to locate federal student loans
Log into your My Federal Student Aid account with the U.S. Department of Education. Or call the Federal Student Aid Information Center at 1-800-4-FED-AID (1-800-433-3243).
How to locate private student loans
Request your free annual credit report (yes, it's really free, and it's legit) at AnnualCreditReport.com. The balances and lender information for your private student loans should be listed in your report.
STEP 2: Decide which loans you want to refinance or consolidate
Should You Refinance Federal Student Loans?
You have an option to consolidate federal loans with a Direct Consolidation Loan. This can simplify your life by changing your loan term and combining multiple separate payments into one.
You also have the option to refinance your federal student loans with a private lender. A private refinance lender may offer you a competitive interest rate based on current market trends and the strength of your credit. You will still have the opportunity to change your loan term and combine several loans into one. While there may be reasons why want to keep your loans federal (like qualifying for federal student loan forgiveness), if your goal is to reduce your interest rate, you will want to look into a private student loan refinance. If you don’t want to lose the benefits of the federal student loan program, you should not refinance your federal student loans.
Parent PLUS Loan Refinance or Consolidation
Your options don’t change just because you have a federal parent PLUS loan—you have the option to include these loans in a federal Direct Consolidation or refinance the loan with a private lender. But there are things you should keep in mind, especially if you want to repay with an income-driven repayment plan or qualify for Public Service Loan Forgiveness (PSLF).
Federal PLUS loans made to a parents are not eligible to be repaid under most income-driven repayment plans—and this also applies to Direct Consolidation Loans which include a PLUS loan made to a parent. There is one exception. You can repay a parent PLUS loan if it is consolidated and that Direct Consolidation Loan is then repaid under the income-contingent repayment plan. You may need to incorporate some strategy into your repayment. You can always pick and choose which loans you want to include (or not include) in a Direct Consolidation or private student loan refinance.
If you want your Parent PLUS Loans transferred from your name to your child’s name, your child will need to apply to refinance the PLUS Loan with a private lender in their own name.
Can I Consolidate Student Loans With My Spouse?
The federal student loan program will not allow you to consolidate your loans with your spouse. However, there are some private student loan lenders which will allow you to refinance your student loan debt with your spouse. It’s always important to remember that once you combine this debt together, the loan becomes a loan with co-borrowers, meaning you will both have a legal responsibility to repay the loan debt.
Federal Joint Spousal Consolidation Loans and Student Loan Refinance
From the mid-90s to the early-2000s, the federal student loan program allowed married borrowers to combine their loan debt into a Joint Spousal Consolidation loan. Many borrowers, upon marriage, want to combine finances and thought this would be a great way to tackle their student loan debt.
Well, fast-forward a few years and this turned out to be a not so great idea, and the U.S. Department of Education discontinued this option. Once the Spousal Consolidation loan is made, there aren’t many options to split up the debt up again (with a few exceptions for student loan discharge or disability reasons). Unfortunately some couples found themselves in a situation where the loan repayment term was been longer than their marriage (eek!).
If you have a Joint Spousal Consolidation loan, and want to refinance this loan, you will need to see which lenders are willing to work with you. Even if they are willing to refinance the loan, they may not be willing to split up the debt. If you other student loans (federal or private) you may just want to work with those and leave this one out of it.
Can You Refinance Private Student Loans?
Absolutely. You can refinance one or more loans for a potentially lower interest rate, to extend your repayment term, or to change lenders. Some people even use refinancing as a means of removing a cosigner from their loans. Private student loans cannot be included in a Direct Consolidation Loan.
When it comes to private student loan refinance, the process is similar to refinancing a car loan. Unfortunately, you can’t just call your lender and ask them to adjust the terms of your loan, you will need to apply and qualify for a new loan. If you have a short credit or employment history, you may need a cosigner for the loan. The cosigner can be anyone like a spouse, parent, or trusted friend or family member.
Can You Refinance More than Once?
If you’ve already been through the refinance process, there’s nothing that will prohibit you from refinancing again. Some common reasons you may want to refinance again:
- You borrowed more loans
- You’ve noticed a drop in interest rates
- You are in a better financial position and you want to improve your loan terms
- You want to change your repayment term (make it longer or shorter)
You will want to check if there are any prepayment penalties or fees with your existing refinance loan (because refinancing again will pay off your current loan). If the answer is yes, you may want to do a cost-benefit analysis to make sure what you pay in penalties doesn’t negate the savings you expect to see from your new refi loan.
Another good idea is to estimate what your new monthly payment will be using our Student Loan Refinancing and Consolidation Calculator. This can help you test different rates and terms as you weigh your options.
Step 3: Apply for Private Student Loan Refinance or Federal Student Loan Consolidation
How to Refinance Student Loans
- Compare student loan refinance lenders.
You have the ability to choose a student loan refinance lender with the most beneficial terms for you. What do you want to achieve by refinancing?
- Lower your interest rate
- Lower your monthly payment amount
- Remove a cosigner
- Reduce the number of loans and servicers you have
- For Parent PLUS borrowers, have your child assume your loan(s) and refinance into their name. Lenders like PenFed Credit Union, CommonBond and Sofi offer this solution.
In general, lenders will require you to have a minimum credit score of around 660 or 680, two years of employment history, and an appropriate debt-to-income ratio, among other eligibility criteria specific to each lender. If you have a lower credit score or your income is lower than desired, you do have the option to apply with a creditworthy cosigner to help you qualify for the loan. A cosigner can be anyone, but for many borrowers, a spouse is a logical choice.
- Choose a lender and loan terms.
After comparing lenders, it’s time to submit your application. Most lenders offer a pre-approval process where you can learn which rate you may qualify for.
Depending on the options available, your lender may allow you to:
- Choose your repayment term (usually five-years or longer)
- Depending on the type of degree you earned, you may be able to extend your repayment term for up to 20 years
- Choose a fixed or variable interest rate
- Choose your repayment term (usually five-years or longer)
- Complete your student loan refinance application
Your lender will now ask you to complete their application process, including submitting verification documents for the underlying loans you are refinancing (essentially, you are asking your new lender to pay off your current loans, and issue you a new loan). If you still need to gather your loan documents, refer to Step 1.
You lender will be in contact with you to let you know if they require any clarification or additional documentation. But make sure to submit the requested information as soon as possible to avoid delays.
Make sure you read all the documentation your lender provides you carefully—these items detail the promise you’re making to repay.
Then sign your application. Many lenders have an online eSignature process, but you may need to mail signed paper applications to the lender.
How to Consolidate Student Loans
This process is managed by the U.S. Department of Education. Remember, you can only consolidate federal student loans into a Direct Consolidation Loan.
- Complete your Federal Direct Consolidation Loan application
You will need to go to StudentAid.gov to complete your loan application. Once you log into the site (with your FSA ID), it will ask you to choose which loans you want to include in the new consolidation loan.
You will notice that you are allowed to “choose” private student loans, however these will not be included in the consolidation loan. The loan balances will only be used to determine your repayment term (up to 30 years).
- Make sure you read all the documentation presented to you carefully—these items detail the promise you’re making to repay.
- Then sign your application. Your new loan servicer will be your point of contact from this point on.
STEP 4: Keep making your loan payments!
Once you submit your application, your new lender or servicer will process the refinance or consolidation loan, and that takes some time. You need to continue sending loan payments to your previous lenders until you receive confirmation that your consolidation or refinancing process is complete. Don’t worry, if you make any payments that occur after the new refinance or consolidation loan is complete, you will be refunded.
You should be on the lookout for final disclosures from your lender which contain the new loan terms you are ultimately agreeing to. This is something that needs to be signed and it signals the end of the road for this entire process.
And then – congratulations!