Debt Consolidation Myths: Can You Refinance Consolidated Student Loans?

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If you’ve got several different student loans spread across multiple servicers, you might have trouble managing your loans or keeping up with your payments. One option that can help is student loan debt consolidation.

A direct consolidation loan combines your federal student loans into one single loan. Instead of having to track multiple student loan servicers and payment due dates, you’ll only make one monthly payment to a single lender (or servicer — sometimes they’re one and the same).

While consolidating student loans can be a smart way to manage your repayment, it is frequently misunderstood. You might be wondering, for example, whether you can privately refinance student loans after consolidation. Yes, you can still refinance consolidated student loans — we’ll get to that, along with these other common misconceptions:

Myth 1: Student loan debt consolidation is the same as refinancing

Many people think consolidation and refinancing are interchangeable terms, but they’re two very distinct processes.

Consolidation Refinancing
● It involves combining federal loans into a direct consolidation loan, which is issued through the Department of Education.
● To pursue student loan debt consolidation, you can start the process on the Department of Education’s website.
● It’s only available through private lenders.
● You can choose to refinance one loan or multiple loans, and they can be federal or private.
● Unlike consolidation, refinancing federal loans with a private lender makes them private loans, meaning you’ll lose access to federal repayment plans and forgiveness programs.
● If you’re interested, compare the best lenders to refinance student loans.

Myth 2: Consolidation saves you money on your loans

Student loan consolidation can simplify repayment by combining multiple federal loans into one — though it won’t save you money on your loans or get you a lower interest rate.

Rather, your interest rate after federal consolidation will be the weighted average of the rates of the loans you’re consolidating, rounded up to the nearest one-eighth of a percent — as such, your interest rates will basically stay the same, if not increase slightly.

Refinancing, on the other hand, can potentially lower your interest rate. As long as you have strong credit and a secure income — or can apply with a cosigner who does — you could snag a lower interest rate and save money on your student loans.

Many borrowers choose to refinance so they can get a lower interest rate, which in turn can help reduce monthly payments and save money on interest over the length of the loan.

If you want to compare the immediate benefits of direct loan consolidation versus private refinancing, check out our refinancing vs. student loan consolidation calculator below:

Consolidation vs. Refinancing Calculator

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Consolidating your federal student loans through the Direct Loan Consolidation program would set your new interest rate at , slightly higher than your current rate of . If you chose to remain on the standard repayment plan, you would pay and would finish paying off your loans in . If you refinanced your student loans, with a and 15 year term, you would pay and pay off your loans by .

Refinancing is the only way to lower your interest rate but you may lose some of the safeguards associated with having federal loans, so make sure you are fully educated on the decision by reading our recommended resources below:

Student loan refinancing APRs as low as %. Check your rate in 2 minutes.

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Myth 3: The only way to lock in a fixed interest rate is by consolidating

For a long time, consolidating your federal loans was the only way to get a fixed interest rate, rather than a variable one, for the length of repayment. That could protect you from market fluctuations and help you save money.

However, that changed in 2006. The government passed a bill that fixed interest rates for the life of federal loans. Even if interest rates skyrocketed after you graduated, you’d continue to pay the same interest rate on your original debt. That means if you have federal loans, there’s no need to worry about consolidating to get a fixed rate; you already have one.

Private loans, however, can come with fixed or variable rates, and the same holds true for refinanced student loans. When you take out a private student loan, or refinance one or more existing ones, you can choose between variable and fixed rates.

Variable interest rates tend to start off lower, but can increase or decrease over time in response to market changes. If your interest rates have increased or you’re concerned about rising rates, refinancing your debt to a fixed-rate loan can provide security.

Myth 4: You can consolidate federal and private student loans together

Only federal student loans are eligible for a direct consolidation loan. Private student loans are not eligible for consolidation through the Department of Education.

That said, you can combine federal and private loans through student loan refinancing. Or, you can pick a single loan to refinance and leave the rest as they are.

When it comes to refinancing, it’s up to you to cherry-pick which loans would benefit from refinancing and which ones would be better left alone. You might decide to only refinance your private loans, for example.

And if you do refinance federal loans with a private lender, you’ll turn your debt private and lose access to federal programs and protections, including direct loan consolidation, income-driven repayment plans and Public Service Loan Forgiveness.

Myth 5: You can’t refinance consolidated student loans

If you already opted for a direct consolidation loan, you might be wondering whether refinancing is still possible. Fortunately, this myth is completely untrue.

A direct consolidation loan is a federal debt, and all types of government-held education debt can be refinanced with a private lender. The fact that you already consolidated has no bearing on your eligibility for refinancing.

Similarly, if you’ve previously refinanced private student loans, but are seeking an even better deal or a chance to alter your repayment, you could always refinance them again. You might reapply with your same lender, or decide to check out the competition.

When refinancing your student loans more than once, however, be wary of unnecessarily extending your repayment or switching to a lender that charges origination or other frivolous fees.

Myth 6: You have to pay to consolidate your loans

There are many companies out there that will charge you a fee in return for consolidating your loans for you. However, don’t fall prey to these and other student loan scams — you can do it yourself for free. The application for federal direct consolidation loans can be completed online in about 30 minutes.

If you have private loans you’d like to refinance, you can do so by shopping for lenders on your own and comparing offers. Once you find terms that work for you, you can submit your application online. The best private lenders don’t charge application, origination or disbursement fees.

Is there a fee to refinance student loans? Click here to find out

Myth 7: You need excellent credit to consolidate student loans

Are you wondering if you have good enough credit for student loan debt consolidation? Rest assured that the consolidation process doesn’t check your credit at all.

To be eligible, you simply need to have qualifying federal student loans that are in active repayment or a grace period. If your loans have become delinquent or fallen into default, you might be able to consolidate them to get them back into good standing.

While consolidation doesn’t have credit requirements, refinancing does. Though refinancing can save you money on your loans, you’ll need to show you have the financial credentials to qualify for lower rates. You (or your cosigner) will need to have a strong credit score and steady income. You can check out our quiz tool to get an idea of whether you might qualify.

Should I rehabilitate or consolidate my defaulted federal loans? Click here to find out

Myth 8: Consolidation is a good idea for all borrowers

While student loan debt consolidation can be a wise move for some, it’s not for everyone. For federal loans, a direct consolidation loan can help you if you plan to apply for an income-driven repayment plan. But it can also extend your repayment term, causing you to pay back more in interest fees.

You run the same risk when you refinance student loans. If you pick a loan term of 15 years, for example, you’ll lower your monthly payments but increase the amount you’ll pay over the life of your loan.

Student Loan Comparison Calculator

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Refinancing also isn’t the right move for you if you’re relying on federal programs and protections. While some private lenders offer flexible terms and forbearance and deferment programs, they don’t provide the same flexibility as Federal Student Aid.

Consolidating and refinancing can help you take control of your debt, but you should ensure you understand the trade-offs and have the financial security to handle your payments going forward before making changes to your student loans.

If you’ve done your homework and decided that student loan refinancing is the better choice, consider our marketplace of top lenders.

Rebecca Safier and Andrew Pentis contributed to this report.