Student loan consolidation vs. refinance

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Ask a Lender
May 5, 2017 | Updated September 25, 2017


Key Points

Dealing with student loan debt

  • Federal student loans can be consolidated but not refinanced.
  • Federal student loan consolidation can extend repayment terms, but will not reduce interest rates.
  • Private lenders can refinance or consolidate federal student loans, but this will disqualify the new loan from any federal repayment protections.
  • Refinancing or consolidating through a private lender can potentially reduce your interest rate and overall monthly payment.

Student loans can feel like a crushing burden for young people trying to get their financial footing or even professionals who have been paying back student debt for years with seemingly no end in sight. When faced with multiple student loans or loans with unfavorable conditions, consolidating or refinancing could accelerate your path to debt freedom by simplifying your payments and reducing costs.

Student loan consolidation involves passing multiple student loan obligations on to one lender that will combine them into a single loan featuring a set interest rate and one monthly payment. Student loan refinancing is the process of taking out an entirely new loan to pay off the existing loan or loans, with that new loan ideally offering better rates and terms.

Federal consolidation

Both federal and private student loans can be consolidated into a single loan. The important thing to remember, however, is that once a federal student loan has been consolidated into a new loan through a private lender, that loan is no longer eligible for federal consolidation, repayment or forgiveness programs.

The government offers a Federal Direct Consolidation Loan program available only for federal student loans. Most federal student loans are eligible for consolidation, including Stafford, Perkins and PLUS loans. The consolidated loan term can be up to 30 years, and the fixed interest rate is the weighted average of the rates on the existing loans.

While the extended term can result in lower monthly payments, consolidation does not reduce the overall cost of the loans. Instead, the benefit lies in simplifying your payments and making them more affordable. As interest rates remain relatively unchanged, having bad credit does not affect your eligibility for Federal Direct Consolidation. Loans consolidated through the government retain all of the graduated and income-based repayment benefits of federal loans.

Private consolidation

Federal loans consolidated through a private lender lose any federal repayment or forgiveness eligibility, but private lenders can offer other attractive incentives. Consolidating federal or private student loans through a private lender not only simplifies the loan-repayment process, but it can potentially save you money as well. Interest rates on private consolidated student loans are not calculated as a strict average of existing rates, as with federal student loan consolidation. Private lenders can offer lower interest rates on the newly consolidated loan; however, they will set the interest rate based on the creditworthiness of the borrower. Compare lenders for the best rates and terms available to you.

If you hold several different federal student loans and are worried that you may not be able to make future payments, Federal Direct Consolidation may be a good option to simplify your obligations while remaining eligible for federal loan-repayment and debt-forgiveness programs. If you hold multiple federal or private student loans and are confident in your ability to repay in a timely manner, private-loan consolidation may help you save money on interest.

Student loan refinance

There are no federal student loan refinance programs, so if you refinance any student loan it will be through a private lender, therefore forfeiting any federal repayment or debt-forgiveness opportunities. That being said, refinancing student loans can offer significant cost savings, particularly if the initial loan was taken out at very high interest rates or if your credit score improved since you obtained the loan.

If you have bad credit, it may be difficult to refinance your student loans into a loan with better rates. Compare lenders to see if you can obtain a better interest rate through refinancing and be aware of whether it is a fixed rate or variable rate. The latter is liable to increase in step with the prime rate. Keep in mind that refinancing into a longer-term loan may reduce your monthly payments but increase your total costs over the life of the loan.

Repeat deals

It is typically not possible to consolidate an existing consolidated federal loan through the Federal Direct Consolidation program, unless it is being combined with another federal student loan. It is possible to privately refinance an existing consolidated loan, although it is unlikely that a lender will offer significantly better terms for a heavily repackaged loan unless your credit score or income has improved dramatically.

The decision to consolidate or refinance your student loans should begin with an assessment of your current and future finances, and how confident you are in your ability to repay the loans. If your income is predictable, you can save money by consolidating or refinancing into a new private loan.

Should you feel that you are at risk of being unable to make your future loan payments, sticking with a federal loan or consolidation program and retaining the associated repayment protections is likely the smarter move.

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