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Student Loan Consolidation vs Refinancing Private Loans

Ben Luthi
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If you’re looking for ways to simplify your student loan repayment strategy or pay down your balance more quickly, you may be deciding between student loan consolidation vs refinancing.

But while the two terms are similar with other types of debt, they’re completely different paths you can take with student loan debt. To make sure you do what’s best with your student loan debt, it’s essential to understand how each option works and what to expect with the process.

Here’s everything to know about refinancing vs consolidating student loans.

What does it mean to consolidate student loans?

Curious about student loan consolidation vs refinancing?

Student loan consolidation usually refers to a federal Direct Consolidation Loan, which is a program provided by the U.S. Department of Education for federal student loan borrowers only — private student loans aren’t eligible.

A Direct Consolidation Loan allows you to combine multiple federal loans into one new loan, which can simplify your monthly payments if you have loans with more than one servicer. Unlike with refinancing, you don’t need to undergo a credit check when you consolidate student loans.

Consolidating can also help you extend your repayment period to up to 30 years, lowering your monthly payments. It may also help you gain access to certain federal student loan benefits you might not have had before.

For example, Parent PLUS loans are eligible for an income-contingent repayment plan only after they’ve been consolidated. Also, consolidating defaulted federal loans can bring them out of default and restore benefits you may have lost while the debt was in collections.

That said, consolidating federal loans through the U.S. Department of Education is unlikely to save you money. The interest rate on your new loan is the weighted average rate of the loans you want to consolidate, rounded up to the nearest one-eighth of a percent.

And if you extend your repayment term with your consolidation loan to get a lower monthly payment, that means you’ll also pay more in interest over the life of the new loan.

Finally, if you’re already on an income-driven repayment plan or in the Public Service Loan Forgiveness program when you consolidate student loans, it resets the clock on your eligibility for loan forgiveness under those programs.

Benefits of consolidating student loans

The primary benefit of a federal Direct Consolidation Loan is, of course, the ability to consolidate — or combine — your student loans together.

By combining your student loans, your debt will become streamlined. Instead of multiple due dates and payment amounts, you’ll have just one bill to remember each month. One payment is typically much easier to stay on top of than a pile of various bills, and your goal should be to never miss a payment. Your credit score will thank you.

Plus, all your debt will also be consolidated under one student loan servicer. If you have a question or concern, you’ll have just a single number to call — a much better scenario than being on the phone all day with a handful of companies.

The primary drawback of consolidating student loans, however, is the fact that only federal student loans can qualify. If you want to combine your debt but also have private student loans in the equation, you’ll have to seek another strategy such as student loan refinancing.

Outside of that, student loan consolidation doesn’t give you the advantage of saving money on interest like student loan refinancing can. With consolidation, all your student loan interest rates are averaged together and rounded up to the nearest percent — meaning you could actually end up paying slightly more in interest over the life of your new loan.

What does it mean to refinance student loans?

It’s important to understand the difference between student loan consolidation vs refinancing.

Refinancing student loans involves working with a private lender instead of the federal government. Borrowers can refinance federal student loans, as well as other private student loans, and can even combine the two types into one new loan.

You can also leave low-interest federal loans with your current servicer and refinance your higher-rate loans.

If you qualify, refinancing can help you lower your interest rate, monthly payment, or both. Student loan refinance lenders may also be able to provide more flexible repayment options, including a shorter repayment term if you want to eliminate your debt faster.

Because you’re working with private lenders, you’ll need to undergo a credit check to get approved for student loan refinancing. That said, there are a variety of lenders out there from which you can choose, and each has its own eligibility criteria.

If you don’t qualify on your own or can’t get a lower rate than what you’re currently paying, you can often apply with a co-signer with great credit and income to improve your chances.

The main drawback of refinancing your student loans is that you’ll lose access to federal benefits, including loan forgiveness programs and income-driven repayment plans. Also, some student loan refinance lenders may have less lenient deferment and forbearance options than what the U.S. Department of Education provides.

Finally, student loan refinance lenders may give you fewer options than the government if you end up defaulting on your student loans.

Benefits of refinancing student loans

With student loan refinancing, you can consolidate federal student loans, private student loans, or a combination of both. And when you refinance student loans, you can save money with a lower rate, pay off student debt faster, choose a lower monthly payment, or pick a blend of repayment strategies.

What does that mean for you when trying to decide between student loan consolidation vs refinancing? Depending your personal student loan payoff goals, refinancing student loans allows you to customize your refinance loan to match your needs.

Below are the three most popular benefits of refinancing student loans:

  • Saving money: Student loan refinancing gives applicants the chance to qualify for a lower interest rate than they currently have. And a lower interest rate means big savings — both month-to-month on your bills and over the long-term payoff of your debt.
  • Paying off student debt faster: With refinancing, you can select a shorter repayment term that will allow you to get rid of student loans more quickly — while paying much less in total interest costs. Plus, most private refinance lenders reserve their lowest rate offers for borrowers who choose shorter terms.
  • Getting a lower monthly payment: By choosing a longer term when you refinance, you’ll be able to drastically decrease your monthly student loan bills. Some lenders offer terms as high as 20 years — so if money is tight, refinancing can help you create more room in your budget.

Beyond those three big benefits, there are plenty of other great reasons to refinance student loans:

  • Consolidate and simplify student loan payments
  • Get a lender with better customer service
  • Choose a variable or fixed interest rate
  • Remove a cosigner from your loan
  • Transfer Parent PLUS Loans to a child

You can also refinance consolidated student loans

Have you already consolidated your federal student loans through a Direct Consolidation Loan? You may be wondering: Can you refinance student loans after consolidation?

Don’t worry — you can still refinance student loans already consolidated with an opportunity to get a lower rate and save money.

Maybe you’ve already consolidated your federal loans and would like a lower rate, or maybe you also have private student loans that you’d like to combine. No matter your situation, it’s possible to refinance student loans after you’ve already consolidated them.

If you’re now in a better place financially — meaning your credit score is high and your income is steady — you may be able to qualify for a lower interest rate through student loan refinancing.

Since federal loan consolidation doesn’t give you the ability to get a lower rate, choosing to refinance consolidated federal student loans could be your chance to save money. Or, if you’d like to pursue a shorter or longer repayment term, refinancing can help with that, too.

Ready to learn how to refinance a consolidated student loan? Read on to understand how to compare refinance lenders and rates so you can get the best possible deal.

How to compare student loan refinance lenders

If you’re considering refinancing your student loans, your best chance of getting the best loan available is to shop around. Using Purefy’s Compare Rates tool, you can compare rates from multiple lenders in one place with just a soft credit check, which won’t affect your credit score.

The tool also allows you to calculate how your monthly payments and the total cost of your current loans compare to what you may qualify for through refinancing.

As you go through this process, make sure to review more than just the rates, though. Be sure to also look at other features each lender offers, such as the option to release your co-signer from the loan, deferment and forbearance terms, and autopay discounts.

With this holistic approach, you can better ensure that you’ll get the best loan for your needs.

Consolidating vs refinancing student loans: Which should you choose?

After debating your options, you may be ready to decide: consolidate vs refinance student loans?

Neither option is inherently better, so it’s important to know your needs and goals before pursuing one.

Consolidation, for instance, is best for borrowers who don’t have a stable income situation and may need access to an income-driven repayment plan. It’s also worth considering if you already have low interest rates and just want to simplify your monthly payments.

Refinancing student loans, on the other hand, is best if you have high interest rates or want more flexibility with payments and don’t need federal loan benefits. More specifically, it’s worth applying if you have a strong credit history and a solid job or you can find a co-signer with those attributes.

To choose between refinancing student loans vs consolidation, think about what your goals are with your student loans. Then consider your current financial situation and check your credit score to see what your chances are of qualifying for refinancing.

If you want to refinance student loans but aren’t eligible on your own or with a co-signer, work on boosting your credit and income to improve your chances of qualifying.

Next Steps

If you’re still not sure between refinancing student loans vs consolidation, keep in mind that you can always refinance student loans that have been consolidated, but you won’t be able to request federal student loan consolidation on refinanced loans. So select the path that gives you more options in the future when you’re certain about what you would like to do.

Regardless of which path you decide to pursue, it’s important to start the process as quickly as possible. Whether you just want a simpler monthly payment, or you’re looking to save money or gain flexibility, the sooner you select refinancing vs consolidation student loans, the sooner you’ll be able to achieve your goals.

And as always, if you have any questions or want advice tailored to your specific situation, you can always reach out to our award-winning customer service team by phone at 202.524.1115, email at [email protected], text at 202.688.5572, or web chat.

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