If you’re a borrower with student debt, no doubt you’ve heard the terms ‘refinancing’ and ‘consolidation’ a lot lately. Maybe you’ve come across articles lauding the benefits of these processes, or you have friends who have refinanced their loans.
But… maybe you’re not really sure what the difference is between the two, or how you’d go about refinancing or consolidating your loans in the first place, and you’re not really sure where to turn.
Look no further! Here are three quick steps to help you decide whether refinancing or consolidation is the best option for you.
1. Do your research
Before you can decide whether refinancing or consolidation is the best option for you, you first have to understand what each option entails, as well as the pros and cons of one over the other. Here’s a quick breakdown of the two different processes.
The type of loans you have will help you determine whether refinancing or consolidation is the best option for you. If, for example, you have federal student loans, you can choose to either consolidate or refinance them. However, if you have private student loans, your only option is to refinance them with a private lender.
|Lender||Rates||Loan Term||Key Details|
|5, 10, 15, 20 year||• Refinance up to $300k|
• Broad list of eligible schools
• Discount up to 0.5%
|5, 7, 10, 12, 15 year||• Refinance $5k to $150k|
• Min household income $75k
|5-20 year||• Autopay (ACH) rate reduction of 0.25% available|
• Consolidate and refinance loans from $5k to $500k
|15, 20 year||• Refinance up to $200k|
• Auto pay (ACH) rate reduction of 0.25% available
• Min income of $30k
|10, 15, 20 year||• Refinance $10K to $250k|
• $24k min income or $18k with cosigner
|15 year||• Refinance $10K+ (no max)|
• $24k min income
|Fixed: 3.49%+||5, 10, 15 year||• 0.25% Autopay discount|
• Add cosigner for best rates
Many borrowers have a combination of both federal and private student loans, and a common question is whether you can refinance both kinds of loans together.
While you cannot consolidate federal and private student loans together into a Federal Direct Consolidation Loan — since only federal loans are eligible for consolidation — you can refinance federal and private loans together. However, you would lose certain benefits that come only with federal loans.
For example, the type of loan you have determines whether you are eligible for federal repayment programs like Revised Pay As You Earn (REPAYE) when repaying your debt ( generally speaking, pretty much all federal loans qualify for REPAYE). If you do decide you want to refinance your federal loans with your private loans, you will have to work with a private lender.
How can you ensure you pick the option that’s right for you? That depends on what you’re trying to achieve. The reasons why you would pick refinancing over consolidation (or vice versa) are different.
IF: You’re only just managing to scrape through each month because all your money is going towards your monthly loan payment, and you want to try and lower your monthly loan payment.
THEN: Consolidation is probably your best bet. If you opt to consolidate your federal student loans, the government will combine all your various loans into a single, direct consolidated loan. The interest rate you pay when you consolidate your loans is a weighted average of all your previous loan rates. Your new consolidated loan will also come with a new repayment term — opting for a repayment term that extends the term of your loan will lower your monthly payments, since you’ll have more time to pay off the loan.
But remember that consolidation doesn’t guarantee a lower interest rate — so your interest will keep growing over the (now) longer term of your loan, meaning that you could potentially be paying a lot more in interest. Also keep in mind that if you have a loan that comes with certain borrower benefits, such as loan cancellation or interest rate discounts, you may lose these when you consolidate your loans.
IF: You’re not really struggling to make your monthly payments, but your payments aren’t getting any easier, and you want to try and pay off your loan faster.
THEN: Opt to refinance your loans. If you feel like the term of your loan stretches out forever, and you can’t see the light at the end of the tunnel, your interest rate may be the problem. Refinancing is when a private lender pays off your old loans and gives you new loans at potentially lower interest rates. Your ability to get a lower rate of interest largely depends on your credit history and your credit score. So if you borrowed money at a time when interest rates were high, and your credit history looks good, refinancing your student loans could help you pay off your loans faster.
While refinancing can help lower your interest rate and pay off your loan faster, it doesn’t guarantee a lower monthly payment. Further, you lose some important borrower benefits that come with federal student loans when you refinance, such as loan forgiveness. So if you repay your loans under any of the federal income-driven repayment plans (like PSLF, PAYE or REPAYE), and you still have a loan balance after 20 or 25 years of qualifying repayment, the unpaid balance will be forgiven.
*The period after which a loan is forgiven depends on the type of plan you have.
2. Figure out whether you qualify
While both refinancing and consolidation can be very helpful options, not everyone may qualify for them.
In order to qualify for loan consolidation, you must:
- Have at least one Direct Loan or FFEL Program loan that you are in the process of repaying, or that is in a deferment or forbearance period.
- If you are in default for a loan but wish to consolidate it, you must first make a repayment arrangement with your current loan provider, or agree to repay the new consolidated loan under one of the government’s income-driven repayment programs (PAYE, REPAYE, IBR).
- If you wish to re-consolidate a consolidated loan, you must usually add another Direct Loan or FFEL Program loan before doing so.
In order to get the best offer when refinancing your loans you should:
- Be in good credit standing and have a good credit score of at least 650.
- Have long term work experience. Stable employment for at least one year shows financial stability and will improve your chances of qualifying for a better offer.
- Consider adding a cosigner. Adding a cosigner with really good credit history can help you qualify for an offer you might not have qualified for by yourself.
- Compare offers from multiple lenders. Different lenders have different eligibility requirements, so be sure to compare a variety of options. Using Credible’s student loan marketplace, you can compare offers from multiple, vetted lenders and find the best offer for you.
3. Ask lenders these important questions
Not all lenders are alike — each lender will consider different things when evaluating you as a borrower, and will offer you different terms and benefits with your loan. So how do you decide which lender is best for you? You can start by asking them the following questions:
- Is the lender offering a competitive rate?
- Does the lender offer both fixed and variable interest rate loans?
- Can they refinance federal and private student loans together?
- What protections can the lender offer you if you lose your job, or can’t afford to make your payments?
- Do they offer loan benefits such as interest rate discounts?
- Can you choose between making lower monthly payments or having a shorter overall repayment term?
- Do they offer any other benefits, such as helping you with your career and networking needs?
- What does the application entail, is it available online, and how long does it take?
- Do they offer you a dedicated client services contact to answer your questions?
- How much will it cost you? Are there any fees, like origination fees or a prepayment penalty?
For even more information on refinancing and loan consolidation, as well as steps to take after you decide to refinance, take a look at Credible’s student loan refinancing guide.
Ariha Setalvad <firstname.lastname@example.org> is a Credible staff writer. Follow us on Twitter at @Credible.