Should You Consolidate or Refinance Your Student Loans?

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Making payments on your student loans is the worst. Unfortunately, there’s no getting around it: You have to pay them back. But how do you know if you’re doing it the “right” way?

Obviously, you want to pay them off as fast as you can. That way, you can spend that money on something more fun. But should you consolidate your loans or refinance them? It can feel overwhelming when trying to make this decision, especially when new offers are constantly arriving in your mailbox.

But don’t sweat it!

By the time you finish reading this article, you’ll know what the differences are and how to pick the right one for you. Ready to dive into student loan consolidation vs. student loan refinancing? Let’s go!

What is Student Loan Consolidation?

When you think about consolidating your student loans, you’re referring to a specific program from the U.S. Department of Education. It’s called a Direct Consolidation Loan, and it combines some or all of your federal education loans into one loan. So, if you have two loans - one for $8,000 and one for $6,000 - they morph into one brand new loan for $14,000.

Doing it this way trades your two separate payments for a single monthly bill. And you can still take advantage of the federal repayment plans and forgiveness programs.

What is Student Loan Refinancing?

Student loan refinancing is similar to consolidation except it’s open to private student loans in addition to any federal student loans you might have.

For refinancing, you take out a new private student loan with a private lender to replace your current loans. For instance, if you have a $5,000 federal student loan and a $2,000 private student loan, refinancing could combine them into one private student loan for $7,000.

The key consideration is that refinancing a federal student loan means it will no longer exist. Since it becomes part of your private student loan, it won’t qualify for federal repayment or forgiveness plans.

How is Student Loan Consolidation Different from Refinancing?

Though they sound the same - both choices combine two or more loans into one - you need to consider their benefits and drawbacks before making a decision.

Types of Loans That are Eligible

Because student loan consolidation is a federal program, it isn’t open to private student loans. If you want to consolidate your federal student loans into a single monthly payment, applying for a Direct Consolidation Loan is simple enough.

Nearly all federal student loans can be consolidated. For a complete list, check out the federal student aid website. But here are a few of the most popular ones that are eligible:

  • Federal Stafford Loans: Subsidized, Unsubsidized, and Nonsubsidized

  • Federal Perkins Loans

  • Nursing Student and Nurse Faculty Loans

  • Direct Loans: Subsidized and Unsubsidized

  • PLUS Loans from the Federal Family Education Loan Program

To get started, you’ll go through a private lender. Your local bank or credit union might be able to help. But you might get a better rate if you shop for loans online. And if you think about it, comparing loans from the comfort of your own home sounds pretty great.

If you’re not sure where to begin, take a look at Credible. It’s an online marketplace that assembles different lenders to help you find the best deal. Just like you’d compare airfare or hotel rates online, Credible lets you compare different terms and interest rates of loans.

Even though you can’t consolidate private student loans, refinancing them is an option. And remember, federal student loans qualify for refinancing, too.

How Your Interest Rate is Calculated

Your credit history might play a role in the interest rate you pay, though how much impact it has depends on whether you choose to refinance or consolidate. You see, the interest on a Direct Consolidation Loan is calculated differently than if you refinanced your loans.

With a Federal Direct Consolidation Loan, the interest rate on your new loan is equal to the weighted average of the loans you just combined.

If you have a decent credit score (or a potential cosigner does), this might not be your best bet. Going through a private lender to refinance your student loans might qualify you for rates as low as 2.80% APR.

Since everyone knows having a lower interest rate can save you thousands over the life of your loan, this is an essential factor.

Repayment Options You Can Expect

Sticking with consolidation lets you tap into the federal student loan payment protections. If you don’t have great credit or want the option of an income-driven repayment plan, or think you might qualify for Public Service Loan Forgiveness, this is the way to go.

But there are advantages of refinancing with a private lender. In addition to the possibility of a lower interest rate, opting for a shorter repayment term when you refinance can save you tens of thousands of dollars, too.

Just don’t forget that refinancing your federal loans makes them ineligible for any of the federal repayment plans.

When to Consider Consolidating Your Student Loans

Even though you can only consolidate your federal student loans once, sometimes it makes sense to do it. Here’s when to consider a Federal Direct Consolidation Loan:

  • To simplify your payments: Rolling your federal student loans into one can make paying them easier. Rather than juggling more than one loan servicer and multiple due dates, you’ll only have to remember one.

  • Access income-driven repayment plans: IDR plans like Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR) is only available with federal student loans. This is crucial if you’re planning to ask for Public Student Loan Forgiveness (PSLF).

When to Consider Refinancing Your Student Loan

If you have more than one private student loan, federal student loan, or a combination of the two, refinancing with a private lender might be the better path. You may want to think about:

  • Lowering your interest rate: Qualifying for a lower rate with a private student loan is a real possibility. Consolidating uses a weighted average of your previous federal student loans. But refinancing gives you an interest rate based on your credit history.

  • Paying off your balance faster: Private lenders can offer you shorter repayment terms when you refinance your private and federal student loans with them. This lets you pay it off more quickly, and can put more money back in your pocket.

Which is Right for You: Consolidating or Refinancing?

Either way, you can save big with consolidating or refinancing your student loans. It comes down to the types of student loans you have and whether or not they’re eligible.

Weighing the pros and cons of any potential savings against the possibility of losing federal payment protections can help you make the right decision. In doing so, you could stamp out student loan debt in record time and save yourself tons of money.

Amy Beardsley is a freelance writer and staff writer for Club Thrifty, a website dedicated to helping people dream big, spend less, and travel more.

Have you consolidated or refinanced student loans? Give us your tips in the comments!

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