If you went to college, you likely had to borrow money to pay for your education. According to The College Board, a four-year college degree costs anywhere from $87,800 to $199,480, depending on whether you opted for a public or private university.
To cover that expense, you probably had to take out several student loans including federal loans, private loans, or a combination of the two.
Saving for College reported that the average number of student loans per borrower is between 8 and 12 – a large number that can make managing your loans not only difficult, but also confusing to remember and pay on-schedule.
Having so many different loans can be overwhelming. You’ll have multiple minimum monthly payments, payment due dates, interest rates, and loan servicers to remember, making it easy to miss a payment and fall behind.
If you want to streamline your payments, here’s how to consolidate student loans and simplify your debt.
How to consolidate student loans and simplify your payments
If you have multiple student loans, keeping track of your debt can be challenging. If you’re having trouble managing your loans, there are two options available to you to make things easier: student loan consolidation and student loan refinancing.
While these terms are sometimes used interchangeably, they’re actually very different processes.
Student loan consolidation
Student loan consolidation is only available for federal student loans. If you have multiple federal loans, such as Direct Subsidized Loans, Unsubsidized Loans, or PLUS Loans, you can apply for a Direct Consolidation Loan and combine your current debt into one loan. Going forward, you’ll have one loan with a single monthly payment and one loan servicer.
Consolidating your loans can give you more time to repay your debt and lower your monthly payment. With a Direct Consolidation Loan, you can have up to 30 years to repay your loans.
The interest rate on your new loan is based on the weighted average of your current loans, rounded up to the nearest one-eighth of one percent. The interest rate is fixed for the duration of your repayment term.
After consolidating your debt, your loan is still a federal student loan, so you’re still eligible for benefits like income-driven repayment (IDR) plans, federal deferments, and Public Service Loan Forgiveness (PSLF).
Student loan refinancing
Student loan refinancing is a debt management strategy for both federal and private student loans. When you refinance your loans, you work with a private lender to take out a loan for the amount of your existing debt, using it to pay off your current loans. Like consolidation, you’ll then have just one loan, with one monthly payment to remember.
However, student loan refinancing is quite different than Direct Consolidation Loans.
With refinancing, you can qualify for a lower interest rate than you had with your previous debt. If you have good credit and reliable income, you can get a lower rate and save money over the life of your loan. You can also opt for a different repayment term; you can shorten your term to pay off your debt sooner or extend it to reduce your monthly payments.
Most student loan refinancing lenders allow you to choose between variable and fixed interest rates. If you want to pay off your loan quickly, you can opt for a variable-rate loan to take advantage of its lower initial rate.
When you refinance your federal loans, they become private loans — so it’s important to keep in mind that you’d no longer be eligible for federal benefits like IDR plans or PSLF.
Consolidation vs. refinancing: Which is right for me?
If you’re torn between student loan consolidation and refinancing, here’s a breakdown of different scenarios to help you make an informed decision:
Direct Consolidation is best if:
- You only have federal loans: If you don’t have private loans, consolidating your loans with a Direct Consolidation Loan may make more sense than refinancing your debt. You’ll maintain access to federal loan protections like IDR plans, federal deferments, and loan forgiveness. If you refinance your debt, you will lose all of those benefits, but it may still be worth it if you can qualify for a lower rate and save money.
- You want to take advantage of income-driven repayment plans: If you can’t afford your payments, signing up for an IDR plan can be a smart way to reduce your monthly payment significantly. By consolidating your loan with a Direct Consolidation Loan, you can streamline your payments and still qualify for an IDR plan.
- You’re eligible for loan forgiveness: If you work for a non-profit organization or government agency and have federal loans, you could qualify for loan forgiveness through PSLF. However, you no longer qualify for PSLF if you refinance your loans. Instead, if you want to get one easy payment and still pursue PSLF, consolidate your loans with a Direct Consolidation Loan.
- Your main goal is to simplify payments: If your primary focus is getting one simple payment and one loan servicer, applying for a Direct Consolidation Loan makes sense. There are no minimum income or credit requirements, and you can combine your federal debt into one easy-to-manage loan.
Student loan refinancing is best if:
- You have private loans: If you have private student loans — or a mix of federal and private student loans — student loan refinancing can be a better choice than Direct Consolidation. With refinancing, you can combine all of your debt into one loan.
- You have excellent credit (or a co-signer): If you have good credit, or if you have a friend or relative willing to act as a co-signer, you can qualify for a loan with a lower interest rate than you have on your existing loans. Over the course of your repayment term, that lower rate can help you save thousands of dollars.
- You want to pay off your debt early: By refinancing your loans, you can lower your interest rate and shorten your repayment term, accelerating your debt repayment. You can pay off your loans months or even years ahead of schedule.
- Your main goal is to save money: With a Direct Consolidation Loan, you won’t save money; in fact, you may even pay more in interest charges under certain circumstances. But with student loan refinancing, you can save money with a lower interest rate. If your focus is saving money, refinancing makes more financial sense than consolidation.
Read More: Insider’s Guide to Refinancing
Now that you know how to consolidate student loans and refinance your debt, you can decide which method is best for you.
If you want to refinance your loans, use Purefy’s Compare Rates tool to get quotes from top refinancing lenders — quickly and easily.