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When you think about consolidating student loans, you’re probably thinking about Direct Loan Consolidation of federal student loans. But there are actually two different ways to consolidate student loans.
In addition to Direct Loan Consolidation mentioned above, you can also consolidate your student loans by refinancing. Both processes combine multiple loans into a new one, but their similarities mostly stop there.
Direct Loan Consolidation only applies to federal loans and it doesn’t lower your interest rate. Refinancing can combine both federal and private loans, and it often lowers your interest rate or your monthly payments.
Confused yet? Read on to learn about Direct Loan Consolidation and refinancing so you know which one is the better option for you.
Direct Loan Consolidation vs. student loan refinancing
When it comes to consolidating your loans, you have two options: taking out a Direct Consolidation Loan from the government or refinancing student loans through a private lender.
While both approaches combine your loans into one, they go about it in different ways. Here are the three main differences between federal student loan consolidation and private student loan refinancing.
1. Types of loans that are eligible
Direct Loan Consolidation is only available for federal student loans, such as Direct or FFEL Loans. Private student loans do not qualify for federal consolidation.
Refinancing, on the other hand, applies to both private and federal student loans. When you refinance, you combine one, some, or all of your old loans into one new loan with a private lender.
This lender could be a bank, an online lender, or a credit union. Because this new private loan replaces your old ones, you’ll essentially no longer have federal student loans.
2. Impact on your interest rate
Federal loan consolidation doesn’t lower your interest rate, but refinancing with a private lender can. In fact, federal consolidation could slightly raise your interest rate.
When the government issues you a Direct Consolidation Loan, it takes the weighted average interest rate of all your loans and rounds up to the nearest one-eighth of a percent.
Refinancing, however, gives you a new interest rate entirely. You also have the option to choose a fixed rate or variable rate. Depending on your creditworthiness and income, you could qualify for a more competitive rate. A lower interest rate could save you hundreds or thousands of dollars over the years.
3. Repayment term options
When you consolidate your student loans, you’ll choose a new repayment plan. But Direct Loan Consolidation and private loan refinancing come with different options.
If you opt for federal loan consolidation, you could choose the standard 10-year repayment term or get on an income-driven plan. Income-driven repayment plans extend your term to 20 or 25 years, depending on the specific plan. At the end of the repayment term, any remaining balance will be forgiven.
If you refinance with a private lender, you have a few more options for repayment terms. Most lenders offer five, seven, 10, 15, and 20-year repayment plans. A shorter term is ideal if you’re able to handle bigger monthly bills and want to get out of debt as fast as possible. If your goal is to lower your monthly payments, a longer repayment period could help you achieve that.
One thing to note is that private lenders might not be very flexible if you run into economic hardship. Federal income-driven plans adjust your monthly payments based on your income, but most private lenders don’t offer such options.
So if your income is unstable, it might not be wise to refinance federal student loans with a private lender just yet. But if you’re confident about your ability to pay back your loan, refinancing could benefit you overall.
Who should take out a Direct Consolidation Loan?
So when does it make sense to take out a Direct Consolidation Loan? There are two main reasons to consolidate your federal student loans:
- You want to simplify your monthly payments. Maybe you have lots of different loans and loan servicers and are having trouble keeping track. By consolidating, you’ll make one monthly payment and no longer have to worry about multiple due dates.
- You need to get on an income-driven plan. Depending on the types of loans you have, you might need to consolidate them to qualify for an income-driven repayment plan.
For instance, Perkins Loans aren’t eligible for PAYE, REPAYE, IBR, or ICR unless you consolidate them first. After consolidating, you can apply for an income-driven plan that extends your loan term and adjusts your monthly bills based on your discretionary income.
When does it make sense to refinance your student loans?
As with federal student loan consolidation, you should consider refinancing with a private lender if you want to simplify your monthly payments. Instead of having to keep track of multiple loan servicers and due dates, refinancing lets you combine it all into just one.
Beyond this, there are some other reasons to apply for refinancing:
- You have a solid job and are confident you can make your student loan payments each month.
- You have a strong credit history and will be offered a competitive rate.
- Your loans have a high interest rate and you want to lower it with a new loan that has a lower interest rate.
- You want to reduce the amount of time it will take to pay back your student loans, even if it means paying more each month.
- You want to choose a longer term to lower your monthly payments.
- You don’t need federal programs such as Income-Based Repayment or Public Service Loan Forgiveness.
Is consolidation or refinancing better for you?
Both consolidation and refinancing have certain benefits and drawbacks. Deciding between the two comes down to your personal situation.
If your main goal is to simplify your federal student loan payments and/or get on an income-driven repayment plan, consolidation could be the right move. But if you have a steady income and good credit score, refinancing could get you better loan terms. Just make sure you understand you’re switching your federal loans into a private one.
There might also be a scenario when both options make sense. You could consolidate your federal loans to simplify your payments. Then, once you improve your creditworthiness, you could apply for refinancing to get a lower interest rate.
As long as you do your research, you’ll be able to choose the solution that works for you.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 5.87% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 5.87% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
Savings example: average savings calculated based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were disclosed. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
Application detail: 5 minutes indicates typical time it takes to complete application with applicant information readily available. It does not include time taken to provide underwriting decision or funding of the loan.
Instant rates mean a delivery of personalized rates for those individuals who provide sufficient information to return a rate. For instant rates a soft credit pull will be conducted, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
Total savings calculated by aggregating individual average savings across total borrower population from 9/2013 to 12/2017. Individual average savings calculation based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were provided. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate||Visit SoFi|
|2.47% – 5.87%1||Undergrad & Graduate||Visit Earnest|
|2.47% – 8.03%4||Undergrad & Graduate||Visit Lendkey|
|2.95% – 6.37%2||Undergrad & Graduate||Visit Laurel Road|
|2.48% – 6.25%5||Undergrad & Graduate||Visit CommonBond|
|2.72% – 8.32%6||Undergrad & Graduate||Visit Citizens|