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If you’ve heard about student loan borrowers changing the terms of their debt to make it easier to repay, you might be asking yourself an important question: Should I consolidate my student loans?
The truth is, that might not be the exact right question.
Often confused, consolidation and refinancing are both potentially helpful options for borrowers. Consolidation involves grouping your federal loans with the government, and the refinancing calls for simplifying the repayment on all your loans (federal and private) with a bank or similar financial institution.
To determine when to consolidate student loans or refinance them, if at all, let’s review the following…
|● Student loan consolidation basics|
● When to consolidate student loans
|● Student loan refinancing basics|
● When to refinance your student loans
|Plus: Beware of consolidation and refinancing scams|
If you have multiple federal student loans and want to simplify your payments, one option is to consolidate your debt with a Direct Consolidation Loan. When you consolidate your loans, the federal government issues you a new loan for the amount of your old ones. Moving forward, you’ll have one single payment and one large loan rather than several.
The interest rate on a Direct Consolidation Loan is fixed, meaning it will stay the same for the length of your loan. The rate is the weighted average of the interest on your previous loans.
By taking out a Direct Consolidation Loan, you can minimize the stress of your debt while retaining your federal loan benefits. Often, a Direct Consolidation Loan can help you qualify for beneficial federal programs such as income-driven repayment (IDR) plans.
|Should I consolidate my loans? Review the pros and cons first…|
|● No credit check necessary to qualify|
● Receive a single monthly bill
● Lower your monthly amount due (if you desire)
● Choose a new, more helpful federal loan servicer
● Switch from a variable interest rate to fixed
● Maintain or gain access to federal loan repayment plans and other government-exclusive safeguards
|● Your interest rate won’t decrease|
● Your principal could increase if you’re consolidating loans with unpaid interest
● You could pay more over time (if you consolidate to a longer repayment term)
● Your progress toward forgiveness programs could be reset, and older federal loans could be stripped certain benefits, such as interest rate discounts
Loan consolidation isn’t for everyone, but it does have certain benefits that can help you beyond just streamlining your payments. Here are three situations where consolidating your debt makes sense.
When you graduate, you’re automatically enrolled in a 10-year Standard Repayment Plan. If you can’t afford your payments, consolidating can help. When you take out a Direct Consolidation Loan, you can extend your repayment term to up to 30 years, significantly reducing your payment.
You’ll pay more in interest over the length of your loan with the longer repayment term, but the trade-off is that you’ll have more breathing room in your budget in the early stages of your career.
If you have older federal loans through the Federal Family Education Loan (FFEL) Program or Perkins Loans, you don’t qualify for the following benefits:
- IDR plans: Under an IDR plan, your repayment term is extended, and your monthly payment is capped at a percentage of your discretionary income. Depending on your income and family size, you could qualify for a payment as low as $0. After 20 to 25 years of making payments, the remaining balance is forgiven. But you’ll owe taxes on the amount that was wiped away.
- Public Service Loan Forgiveness (PSLF): If you work for a qualifying nonprofit organization or government agency, you might be eligible for loan forgiveness through PSLF. After making 120 qualifying payments – payments made under an IDR plan qualify – the remaining balance of your loans is forgiven, tax-free.
But there’s a workaround: When you consolidate your loans, they become part of the Direct Loan Program. Moving forward, you could now be eligible for both IDR plans and loan forgiveness.
If you have older federal loans, you may have some with variable interest rates. That means the interest and monthly payment can change according to market conditions.
If you want the stability of a fixed-rate loan with steady payments, consolidating can help. Once you consolidate, your new loan will have one fixed rate and a payment that stays the same for the duration of your loan.
|Eligible loans||Federal loans||Federal and private loans|
|Lender||The Department of Education||Banks, credit unions, online companies and state-run refinancing authorities|
|Key benefit||A single monthly payment – while retaining federal loan protections||A single-monthly payment – with the possibility of lowering your interest rate to save money|
Although some people use the terms “consolidation” and “refinancing” interchangeably, they’re very different. Although a Direct Consolidation Loan has some benefits, it’s unlikely to save you money. And if you have private student loans, you’re not eligible for consolidation.
Refinancing works differently. With this approach, you take out a refinancing loan from a private lender for the amount of some or all of your federal or private loans. The refinanced loan can have entirely different terms, such as a new…
- Repayment period
- Minimum monthly payment
- Interest rate
But there are also some drawbacks to refinancing student loans. If you refinance federal loans, for example, you’ll lose out on perks such as access to IDR plans and PSLF.
|Should I refinance my loans? Review the pros and cons first…|
|● Receive a single monthly bill|
● Lower your interest rate or your monthly amount due
● Choose a new, more helpful lender
● Switch from a variable interest rate to fixed
|● Eligibility requirements can be stiff (though you could apply with a cosigner)|
● Locking yourself into a repayment plan (though you could always refinance multiple times)
● You could pay more over time (if you refinance to a longer repayment term)
● Losing safeguards specific to federal loans
In some situations, refinancing your student loans may be a better option for you than consolidation. Here are some situations where refinancing can help.
Through refinancing, you could qualify for a lower interest rate, which can help you save hundreds or even thousands of dollars over the length of your loan.
For example, if you had $35,000 in student loans, a 10-year repayment plan and a 7.00% interest rate, you’d repay a total of $48,766 over the length of your loan, according to our monthly payment calculator. Because of interest, you’d pay nearly $14,000 on top of the amount you borrowed.
But if you refinanced and qualified for a 10-year loan at a 4.00% interest rate, you’d repay $42,523. By taking a few minutes to submit your refinancing application, you’d save over $6,000.
If you have private student loans – or older federal loans, as mentioned – you might have a variable interest rate. Because variable rates can fluctuate over time, your payments can increase, too.
If you prefer one set payment each month, you can refinance your loans and opt for a fixed interest rate. Your rate will never change, so your payments stay the same for the length of your repayment.
If you’re struggling to afford your monthly payment, refinancing can help reduce it. You can qualify for a lower interest rate and a longer repayment term, decreasing how much you owe each month.
For example, if you had $30,000 in loans, eight years left of repayment and an interest rate of 7.00%, your monthly payment would be $409. If you qualified to refinance at a 4.00% rate and extended your term to 15 years, your payment would drop to $222. Thanks to refinancing, you’d free up $187 a month in your budget.
You can use our calculator to see how much you can save by refinancing your student loans:
Student Loan Refinancing Calculator
In recent years, many scams have arisen that prey on borrowers struggling to keep up with their payments. For example, some companies will offer to consolidate your loans for you for a fee.
But consolidating your federal loans is completely free, and there’s also no fee to refinance student loans.
When it comes to consolidating or refinancing your loans, avoid companies that try to charge you fees to get started.
Should I consolidate my student loans?
The answer to this question depends on several factors, including whether you want to simplify your payments with the federal government or save money by refinancing with a bank, credit union or online lender.
Remember that while refinancing your old private student loans might be a no-brainer, stripping your federal loans of their government-exclusive protections is a more complicated question – and only you can answer it.
Weigh the pros and cons of consolidating student loans or refinancing them to choose a secure path for you and your finances.
If you’re ready to refinance, check out our student loan refinancing marketplace.
Andrew Pentis contributed to this report.
Interested in refinancing student loans?Here are the top 6 lenders of 2021!
|Lender||Variable APR||Eligible Degrees|
|1.89% – 5.99%1||Undergrad & Graduate|
|1.99% – 5.64%2||Undergrad & Graduate|
|1.99% – 6.84%3||Undergrad & Graduate|
|1.91% – 5.25%4||Undergrad & Graduate|
|2.25% – 6.53%5||Undergrad & Graduate|
|2.17% – 4.47%6||Undergrad & Graduate|
|Check out the testimonials and our in-depth reviews! |
1 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of Feburary 1, 2021.
2 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 2.98% APR (with Auto Pay) to 5.49% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.34% 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 October 26, 2020, 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 10/26/2020. 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 [email protected], or call 888-601-2801 for more information on our student loan refinance product.
© 2020 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.
3 Important Disclosures for CommonBond.
Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.15% effective Jan 1, 2021 and may increase after consummation.
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.
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of 5 years and is reserved for applicants with FICO scores of at least 810.
As of 02/17/2021 student loan refinancing rates range from 1.91% APR – 5.25% Variable APR with AutoPay and 2.95% APR – 7.63% Fixed APR with AutoPay.
5 Important Disclosures for SoFi.
6 Important Disclosures for PenFed.
Annual Percentage Rate (APR) is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rates range from 2.99%-5.15% APR and Variable Rates range from 2.17%-4.47% APR. Both Fixed and Variable Rates will vary based on application terms, level of degree and presence of a co-signer. These rates are subject to additional terms and conditions and rates are subject to change at any time without notice. For Variable Rate student loans, the rate will never exceed 9.00% for 5 year and 8 year loans and 10.00% for 12 and 15 years loans (the maximum allowable for this loan). Minimum variable rate will be 2.00%. These rates are subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.