Should I Consolidate My Student Loan or Refinance?

4 Common Consolidation Questions Answered

When you graduate from college, you’re not alone leaving school with student loan debt. In fact, graduates leave with over $37,000 in loans, on average. That number might be a result of taking out several student loans. Juggling all of those loans with different lenders, monthly payments, and bill due dates can be stressful.

If you’re looking to streamline your loans, loan consolidation and student loan refinancing are two options to consider. While the terms are often used interchangeably, they’re actually very different processes, each with their own unique benefits and drawbacks.

We’ve created this article to answer common student loan consolidation and refinancing questions, along with quick links below to jump to each section:

Should I Consolidate My Student Loan?

If you have federal student loans, you may have heard about Direct Loan Consolidation. With this option, you work with your federal loan servicer to combine your current loans into one large loan. There are some benefits to consolidating your loans:

Loans ineligible for loan forgiveness become eligible: If you have older federal loans, they may not be eligible for Public Service Loan Forgiveness (PSLF). When you consolidate them into a Direct Consolidation Loan, those loans may then qualify for PSLF consideration.

Loans ineligible for income-driven repayment plans become eligible: Similarly, some student loans are not eligible for income-driven repayment plans. But if you consolidate them, they qualify for plans like Income-Contingent Repayment or Pay As You Earn.

One of the most practical benefits of loan consolidation is that you have one easy payment. Instead of juggling multiple loans and monthly payments, going forward you’ll have one loan and one payment to remember.

When Should I Consolidate My Student Loan?

If you are not in school or are enrolled less than part-time (perhaps in a post-baccalaureate or non-matriculated program) and if the loan under your name is in a repayment or grace period, you may be eligible for loan consolidation.

Are you having trouble making your monthly federal loan payments due to job loss, under-employment or any manner of personal and professional challenges? Loan consolidation might be a helpful solution. Though the repayment terms may change through consolidation, you may be able to take advantage of short-term savings by having a lower monthly amount due.

You may also be interested in loan consolidation if you’ve recently graduated and want to get a lower fixed interest rate on all your federal loans before your grace period (usually six months) ends. This is a smart way to get ahead of repayment and plan ahead for future financial needs and decisions.

Can I Consolidate My Student Loans More Than Once?

According to the U.S. Department of Education, you generally cannot consolidate an existing consolidation loan, unless you include another eligible loan into your preexisting plan. However, under special circumstances, you can reconsolidate an existing Federal Family Education Loan (FFEL) if:

  • You are delinquent or have defaulted your FFEL Consolidation Loan and elect to repay your new Direct Consolidation Loan under an income-driven repayment plan
  • You are looking to qualify for the PSLF Program
  • You are an active duty service member and want to use the no accrual of interest benefit–which means you’re not required to pay the interest that accrues during periods of qualifying active duty military service (for up to 60 months) on the portion of a Direct Consolidation Loan that repaid a Direct Loan Program or FFEL Program loan first disbursed on or after Oct. 1, 2008

Is It Better to Consolidate My Loan? What are the Downsides to Loan Consolidation?

When you consolidate your federal loans, you lose the individual benefits or features of each once they are combined into one bulk loan. Be sure to look into each of your loan’s repayment flexibility, interest rates and forgiveness policies before deciding to consolidate. In many cases, your monthly rate is lowered by increasing the full term of repayment, so you may end up paying more in interest over time.

Furthermore, when you consolidate, your loan is assigned an interest rate based on the weighted average of your current loans (some of which may be very low and easy to pay back quickly), so consolidating may not help you save any money in the long run like refinancing can.

Also, if you are pursuing PSLF, it’s important to know that consolidating your loans restarts the clock. You’ll lose credit for any payments you made toward the 120 qualifying payments and will have to start over.

If you have private student loans, you can’t consolidate your loans with a Direct Consolidation Loan. Instead, you have to pursue private loan consolidation by refinancing your student loans.

Reasons to Refinance Student Loans

Student loan refinancing works differently than student loan consolidation. While Direct Consolidation Loans are only for federal student loans, refinancing works for both federal and private student loans. Even if you have a combination of each type, you can refinance your debt.

With refinancing, you work with a private lender like College Ave to take out a refinancing loan for the total amount of your current student loans. Then, you use that loan to pay off your debt. Going forward, you have just one loan and one monthly payment, just like you would with federal loan consolidation.

However, refinancing takes it a step further. Your new loan will also have completely different terms than your previous debt. You’ll have a new interest rate, repayment term, and monthly payment, too.

There are some drawbacks to refinancing, particularly if you have federal student loans. You’ll lose out on perks like access to income-driven repayment plans, public service loan forgiveness, and the ability to place your loans into deferment or forbearance. However, refinancing does offer some unique benefits over loan consolidation that may make the tradeoff worth it.

1. You can save money

With a lower interest rate, you can save a significant amount of money on your loans if you keep the same repayment term.

For example, say you had $35,000 in student loans with a 10-year repayment term and a 6% interest rate. Over the course of your repayment, you’d pay a total of $46,628.61. Due to interest charges, you’d owe more than $10,000 more than you originally borrowed.

But if you refinanced, you could reduce that amount dramatically. If you qualified for a refinancing loan at 4% interest and kept a 10-year repayment term, you’d repay just $42,522.96. Refinancing would help you save over $4,000.

For more information on how much you can save, check out our student loan refinancing calculator.

2. You can reduce your monthly payment or overall cost

With student loan refinancing, you can reduce your monthly payment in two ways: qualifying for a lower interest rate or extending your repayment term.

With a lower rate, you’ll likely pay less interest over the length of your loan, reducing your overall loan cost and helping you save money.

If you’re looking for a more affordable monthly payment, extending your repayment term may be right for you. Keep in mind, extending the loan term will increase the amount of interest, and overall loan cost.

3. You can pay off your debt earlier

With a lower rate or a shorter repayment term, you can pay off your debt sooner than you thought. More of your monthly payment goes towards the principal rather than interest, so you could get rid of your loans years ahead of schedule, freeing up money to pursue your other financial goals.

Managing your debt

When it comes to managing your loans, figuring out the best path for you can be overwhelming. By doing your homework and researching all of your options, such as refinancing or loan consolidation, you can choose the best option for you and your financial goals.

If you’re simply looking to streamline your payments for only your federal student loans, consolidating your debt may make sense. However, if you’re looking to save money, reduce your monthly payment, or combine both federal and private student loans, student loan refinancing might be the right choice.

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