Best Student Loan Refinancing and Consolidation

You have a few options when it comes to managing your student loan debt, including consolidation and refinancing. If you’ve done any research on the topic, you know firsthand how confusing it can be to understand the differences between the two and which option is right for you. Our goal is to break it down and make it as simple as possible for you to make an informed decision.

Simply put, consolidation is the act of combining multiple loans into a single loan with one lender and one monthly payment. Refinancing offers many of the same benefits, but it also allows you to save money through improving your interest rate and/or payment terms.

Let’s take a deeper dive into your options and highlight some of the most common terms you’ll see.

Federal loan consolidation

If you have government-issued student loans like Stafford loans or Perkins loans, you have the option to do loan consolidation through the federal government with a Federal Direct Consolidation Loan. These consolidation loans take all of your government-issued student loans and combine them into one new loan.

Only federal student loans qualify for this program. You cannot consolidate private student loans via a Federal Direct Consolidation Loan.

The new loan’s interest rate will be a weighted average of the loans you’re consolidating. For example, if you’re consolidating two equal federal loans, one with an 8% interest rate and one with a 6% interest rate, the interest rate on your new, consolidated loan will be 7%. However, things get more complicated when your loans aren’t the same size.

Here’s an example of how to calculate the consolidated interest rate of unequal loans. Let’s say you have a total student loan debt of $100,000 across two loans — one for $75,000 and one for $25,000. First, divide the total balance owed on each loan (including interest and principal) by your overall amount of student loan debt. Next, multiply that value by the loan’s interest rate.

Add together the result for each loan (rounding up to the nearest 1/8th of a percent) to get the interest rate of your new loan.

So, your federal consolidation loan would have an interest rate of 6.5%.

Private loan consolidation

Private loan consolidation is the act of consolidating your student loans through a private lender. Both federal and private student loans can be consolidated through a private lender. However, if you choose to consolidate your federal loans with a private lender, you will lose any federal borrower protections you currently have on your government-issued student loans. These include:

• Deferment and forbearance
• Income-driven payment plans, like PAYE (pay as you earn)
• Other loan forgiveness programs, like government plans for public service workers and teachers

There is no forgiveness for private loans.

Private loan consolidation is also where the terminology can get tricky. Through private loan consolidation, you also have the opportunity to refinance the loans you’re consolidating. Some sources online may use these terms interchangeably and make it more complicated than it needs to be.

Consolidating is the act of turning multiple loans into one loan; refinancing is done to get a better interest rate or loan terms. They can be done separately or together.

Student loan refinancing

With student loan refinancing, you will take out a new loan and use it to pay off your existing student loan(s). If you have multiple loans, this part of the process is essentially loan consolidation. What makes refinancing different is that through refinancing you can qualify for a new, lower interest rate and/or negotiate new loan terms. Student loan refinancing is ideal for those with good credit, as those with higher scores are likely to save more money by qualifying for the lowest available interest rates.

Student loan refinancing is only available through private lenders. So, if you want to refinance your government-issued loans, you will have to do it through a private lender and lose all of the federal protection benefits mentioned above.

Consolidating federal student loans can be done online with a guided application and should take about 30 minutes to complete.

To consolidate your federal student loans:

1. Go to studentloans.gov and complete the Direct Consolidation Loan Application. You will need to create a Federal Student Aid (FSA) ID if you do not already have one.
2. Select which loans you want to consolidate.
3. Choose your repayment plan. You’ll have the option to select a time-based repayment plan or income-based repayment plan.

After you complete the application, you should hear back within 30 to 60 days. You’ll need to keep making your regular student loan payments as scheduled while you wait.

Consolidating can also be done through private lenders, but processes for that vary by lender.

Pros and cons of consolidating student loans

There are both positive and negative aspects to consolidating your student loans.

Benefits of consolidating student loans

• One payment: Make your life easier with only one bill to pay each month.
• Fixed loan rate: While there are pros and cons to both fixed and variable interest rates, having a fixed rate means you always know what to expect and your payment will stay consistent over the life of the loan.
• Adjust your loan terms: When you consolidate your loans, you’ll have the option to select an income-based or time-based repayment plan. Depending on which you select, you may be able to lower your payments by increasing the length of your loan term.
• No credit check: Unlike refinancing, consolidating your federal student loans requires no credit check or prerequisite.

Downsides of consolidating student loans

• You won’t necessarily save money: Federal loan consolidation will not save you money. It simply makes the repayment process easier by combining loans. The interest you’ve accrued so far will also be added to your principal balance, which may mean higher payments. Private loan consolidation (with refinancing) may save you money, though.
• You won’t necessarily get a better interest rate: With federal consolidation loans, your interest rate will be set using a weighted average, meaning you will pay in the same interest you would have before consolidating.
• You may pay more: The option for a longer repayment term means lower monthly payments, but it also means you pay more in interest over time.

Should I consolidate my student loans?

We recommend looking into consolidating your student loans if any of the following are true:

• You are satisfied with the current terms of your loans and want a simplified repayment method
• You need the benefit of an income-based repayment plan (these are unique to federal student loans and federal student loan consolidation)
• You want to get out of default on your current student loans
• You want to become eligible for the Public Service Loan Forgiveness Program (PSLF)

Lowering your monthly payment through consolidation only can also be a good option if you’re struggling to make your current monthly payments. However, it will lengthen the loan’s term, meaning you’ll pay more in interest.

If you’re trying to decide when to consolidate student loans, be sure to weigh your options and decide if lowering your monthly payments will be best for you in the long run. You may want to simplify multiple payments into a single, monthly fee by consolidating your student loans without choosing to lengthen your repayment term.

Unlike with federal student loan consolidation, refinancing through a private lender means you have options. You’ll want to shop around and get information from multiple lenders to determine which rates work best for you.

If you think you’ll be able to pay off the loan quickly, you might want to select a variable interest rate instead of a fixed interest rate. Variable interest rates are tied to an index rate and can change as often as each month, while a fixed rate is locked in for the length of the loan. With a variable rate, if the index rates go down, your interest rate goes down with it. However, this means the flip side is also true, and your interest rate can go up. A variable interest rate can save you money, but a fixed interest rate is a safer option.

To refinance your student loans:

1. Get quotes from multiple lenders.
2. Select a lender.
3. Gather important assets. To apply, you’ll need a government-issued ID, proof of citizenship, proof of income and official statements from all of the federal and private student loans you want to refinance.
4. Select your loan term. Decide if you’d prefer a variable or fixed interest rate and compare the cost benefits of paying off your loans with different repayment terms. For example, try comparing a five-year repayment plan with a 15-year repayment term.

You’ll continue to pay your student loans while you wait for approval.

Pros and cons of refinancing student loans

There are both positive and negative aspects to refinancing your student loans.

Benefits of student loan refinancing

• You’ll save money: Perhaps the biggest benefit of refinancing your student loans is the option to get a new, lower interest rate. This has the potential to save you quite a bit of money over the length of your loan.
• Variable or fixed rates available: Refinancing gives you the option to select a fixed or variable interest rate. This is unlike federal loan consolidation, where you get a predetermined fixed interest rate.
• Adjust payment terms: You’ll have the opportunity to change the term of your loan, either by shortening or lengthening.
• Choose your lender: Going the private lender route means who you work with is 100% up to you.
• Enjoy the benefits of consolidation: While you can choose to refinance a single loan, refinancing your student loans usually includes consolidating multiple loans into one. This means you get the same benefits of consolidation while enjoying the better interest rates and terms that come with refinancing.

Downsides of student loan refinancing

• Lose federal borrower protections: By refinancing federal student loans with a private lender, you will lose the ability to defer your loans or qualify for student loan forgiveness.
• There may be fees: When you’re shopping around for a lender, be sure to ask if there are any origination fees or other costs associated with the loan.
• You may not save as much as you want: While most people save money through refinancing, adjusting the length of your payment term can mean you pay more if you’re not careful.
• Your credit score matters: Refinancing requires a credit check, and the best interest rates will go to those with higher scores.

Should I refinance my student loans?

If you have good credit and are looking for ways to save money on your student loans, we recommend looking into refinancing. Refinancing is good for those with a regular, steady income who do not anticipate needing an income-based repayment program through the government. Refinancing gives you a lot more say over the terms and conditions of your loans, including getting an ideal interest rate and customizing your repayment terms. For the right person, refinancing can be a good, money-saving choice.