What Is Student Loan Refinancing?
If you are like most college students and graduates in the U.S., you have some debts to pay off. According to data collected by Forbes, 45 million borrowers owe more than $1.5 trillion in student loans.
Refinancing is one of the most popular methods for handling debt. In refinancing, existing loans are consolidated by a private lender — this may be your current lender or a different lender — and are replaced by a new, single loan. Student loan refinancing offers borrowers a new interest rate based on their current finances, potentially lower payments, and the ease of managing debt with a single company.
Is Student Loan Refinancing Worth It?
Like every method of financial management, student loan refinancing has potential benefits and drawbacks.
On the upside, refinancing leads to simplification. Borrowers can consolidate multiple loans — both federal and private — into a single monthly payment with a private lender of their choice. Refinancing also often leads to a lower interest rate, which can result in major savings over time. Borrowers can apply for their refinanced loan with a cosigner to lower this rate further.
On the downside, lenders often have lofty eligibility requirements for loan refinancing, e.g., a strong credit record and/or a low debt-to-income ratio. Additionally, refinancing federal loans with private lenders removes protections like forgiveness programs and the flexibility to change your payment plan as needed.
- When to Refinance Student Loans
Generally, refinancing student loans with a private lender is a good idea for individuals who have a stable income and a good credit score — two factors that typically lead to better loan terms and lower interest rates.
Refinancing is also the only current way to combine your federal and private student loans. If you have multiple loans from multiple lenders, refinancing provides the convenience of a single monthly payment.
- When You Should Not Refinance Student Loans
If you lack a stable income or have poor credit, choosing to refinance school loans may not be the best choice. Unlike federal loans, which often allow borrowers to adjust payment plans as needed, private lenders require borrowers to meet locked-in monthly payments with little flexibility. If you anticipate having trouble making payments, sticking with federal loans is a safe choice.
Additionally, individuals who plan to utilize a federal forgiveness program, such as public service loan forgiveness or teacher loan forgiveness opportunities, should not refinance with a private lender.
What Is Student Loan Consolidation?
Consolidation simply means combining multiple loans with varying interest rates and payment plans into a single loan with one payment plan and one interest rate. Technically, the refinancing discussed above is a form of consolidation, where private and/or federal loans are combined by a private lender.
Student loan consolidation is also offered by the U.S. Department of Education, where borrowers can combine multiple federal education loans into a single federal loan. Unlike working with a private lender, a federal Direct Consolidation Loan has limited eligibility requirements and requires no credit check or application fee.
Is Student Loan Consolidation Worth It?
School loan consolidation comes with its own set of pros and cons.
The biggest benefit of consolidation is that borrowers can combine their debt into a single convenient payment, eliminating the need to juggle finances and make multiple monthly contributions. Depending on your loan terms, consolidation can also help you avoid default by offering lower payments and/or extended repayment times.
Unfortunately, these extended repayment plans can result in a higher cost overall — federal loan consolidation does not guarantee lower interest rates. Consolidation of loans may also result in the loss of borrower benefits, such as cash rebates, interest, principal, or payment reductions.
- When to Consolidate Student Loans
Consolidating your federal student loans may be a good idea if you have multiple loans and you desire the convenience of one monthly payment. Federal consolidation can also get your loans out of default, as long as you have at least one loan that has not defaulted.
Choosing to consolidate with the federal government rather than refinancing with a private lender is especially beneficial for borrowers who want to retain their ability to take advantage of flexible repayment plans.
- When You Should Not Consolidate Student Loans
Consolidating is not the best choice for every borrower. This is especially true for individuals who have made payments toward a federal loan forgiveness program. Consolidating loans that are currently under a forgiveness plan will cause borrowers to lose credit for any payments already made toward the plan.
Another argument for retaining separate loans is the ability for borrowers to pay down their highest-interest debts faster. Consolidation removes that option, often resulting in increased payments over time.
Should You Refinance or Consolidate Your Loans?
Deciding whether school loan consolidation or refinancing is right for you depends on your individual financial situation, current loan terms, and repayment priorities.
If saving money is your primary concern, refinancing may be your best bet. When consolidating federal loans, any outstanding interest becomes part of the principal balance on your new loan. Combined with extended payment terms, you can expect to contribute more over time with consolidation.
Refinancing with a private lender, however, typically results in a lower interest rate. By refinancing, borrowers with a steady income and good credit can pay less out of pocket over the life of their loan.
Federal consolidation is better suited to borrowers whose primary goal is making on-time payments and avoiding default — particularly individuals with fluctuating or uncertain income, bad credit, or multiple loans. Consolidation with the federal government allows you to receive affordable monthly payments, change your payment plan as needed, and participate in forgiveness programs.
What to Do If You Cannot Refinance or Consolidate Your Loans
Refinancing and consolidation are both useful tools for Americans facing student loan debt. Unfortunately, not every borrower qualifies for these options. Federal consolidation is limited to eligible federal student loans, while private lender refinancing comes with qualifications that can be difficult to meet.
If you have difficulty finding a private lender who will reconsolidate your loans, there are a few steps you can take. The most obvious — and often most difficult — path involves improving your credit and increasing your income. You can also get a cosigner with good credit and income to help you qualify.
The federal government offers several options outside of consolidation. Consider applying for a forgiveness program, income-driven repayment plan, or deferment — if you qualify.
Remember that you can pick and choose which loans to refinance or consolidate. If you have a high-interest loan, you may choose to keep it separate. Making aggressive payments will bring the balance down, and you can consider consolidating or refinancing other low-interest loans.
Alternative Loan Repayment Options
If school loan consolidation and refinancing are not viable options for you, consider applying for an income-driven repayment plan. This alternative, which is limited to federal student loans, provides borrowers with an affordable monthly bill. Although you may not save on interest, your remaining balance qualifies for forgiveness at the end of a 20-25-year repayment term.