The Comprehensive Guide to Student Loan Refinance and Consolidation

In this guide we’ll go over the following questions:

Student loan refinancing and consolidation are popular methods of saving money or managing loan payments. But how do they work? Which is the right option for you? What are the pros and cons? We’ll answer all that and more in this guide.

What is the Difference Between Refinancing and Consolidation?

First, some basics.

  • Refinancing: Refinancing your student loans means that you simply take out a new loan and use the money to pay off your existing loan. This means you will get a new interest rate and new loan terms.
  • Consolidation: Student loan consolidation is the act of taking multiple student loans and combining them into one single loan, with one monthly payment and one set of loan terms.

Reasons to Refinance Your Student Loans

Let’s start with refinancing. There are a number of benefits to refinancing your student loans, including:

  • Lowering interest rates
  • Lowering monthly payments
  • Changing loan term length

Lowering Interest Rates

Perhaps the biggest benefit of refinancing is earning a lower interest rate. By making payments on time with your current loan, you are developing a credit history. With a more established credit, lenders are more willing to lower your interest rate. This can save you a ton of money in the long run, as interest can add up fast to the total cost of the loan.

Lowering Monthly Payments

If you find yourself struggling with the amount of your current monthly payments, it can help to lower the cost to a more manageable level. Making payments on time will help you avoid defaulting. However, lowering the monthly payment will more than likely extend the total life of the loan.

Changing Loan Term Length

On the opposite end of the spectrum, if you’re eager to pay off your student loan, you can shorten its lifespan by increasing your monthly payments. The quicker you pay it off, the more money you save, and the sooner you’ll be out of debt entirely. However, reducing the length of your loan will likely increase your monthly payments.

The Importance of Interest Rates

A lower interest rate sounds all well and good, but how much does it actually impact your student loan? To really emphasize how much an interest rate can affect the total cost of a loan, let’s look at a few examples.

*Note: Since “total interest paid” and “savings” will depend entirely on when you refinance the loan, these numbers are meant to highlight how much an interest rate will affect the total cost of the loan, rather than actual calculations of potential savings.

When to Refinance Your Student Loans

The best time to refinance your student loans is after you have started earning a stable income, you’ve made a few successful loan repayments, and you have managed to build your credit history. Lenders often offer better interest rates to borrowers who meet these three requirements. The earlier you refinance your loans at a lower rate of interest, the more you will save in interest payments.

However, this can take a few months to a year after graduation as you have to wait till you start earning a steady income and have had some time to improve your credit score. You may find it difficult to refinance immediately after graduation and even if your request is approved, you could pay a much higher rate of interest, which may not be worth it in the end.

How to Refinance Your Student Loans

Refinancing can only be done through a private lender, so step one is deciding which lender to go through. It’s important to shop around to look for the best rates and terms, comparing several before settling on one.

Refinancing Federal Loans

The federal government doesn’t refinance federal loans. While you can refinance federal loans through a private lender, you will lose any and all benefits associated with the original loan—such as student loan forgiveness or income-based repayment plans. Be sure to understand what your current benefits are so you don’t make an unwise switch.

Refinancing Private Loans

When it comes to refinancing private loans, you usually go through a traditional credit check, and may need a cosigner to qualify—if you haven’t had time to establish good credit yet. However, this could save you a lot on your monthly payments, in addition to securing you more favorable terms—like a lower interest rate.

Refinancing Federal & Private Loans

If you have both federal and private loans, you can refinance them both at the same time—but remember: refinancing your federal loans means you will lose the benefits associated with them including flexible repayment plans and certain loan forgiveness options. And, generally speaking, federal loans tend to have lower interest rates, so if you choose to refinance, make triply sure you’re getting better rates or terms before signing.

Is Refinancing Right for You?

So, now that you know all about refinancing, there are some questions to ask yourself to determine if it’s right for you:

  • Do I want a lower interest rate?
  • Do I want a shorter repayment period?
  • Do I want lower monthly payments?
  • Am I willing to give up federal benefits for any of the above?
  • Do I have good enough credit / can I build better credit?
  • Do I have a steady income?

If you can comfortably answer “yes” to the majority of these questions then you might be ready to refinance your student loans.

Reasons to Consolidate Your Student Loans

Now onto consolidation! To start, there are several potential benefits to consolidating multiple student loans into one:

  • One single monthly payment
  • One set of loan terms
  • Easier to manage your loan

One Monthly Payment

Keeping track of multiple student loan payments can be a headache. Missing a payment by even a day could  put you at risk for defaulting or harm your credit score. By consolidating your student loans instead, you only have to remember one single payment per month—which makes things a lot easier to keep track of! 

One Set of Terms

Each loan you took out likely had their own rules and terms. They may even be with different lenders. By consolidating your loans, you’ll receive one set of terms for the whole thing. This may mean that your interest rate, repayment period, and other conditions change to fit your new loan.

Easier to Manage Your Loan

Given that you’ll have one monthly payment and one set of terms, a consolidated loan makes life a lot easier. You don’t have to worry about juggling a bunch of details for different loans. Consolidating is a great way to stay on top of your payments and avoid accidentally missing anything and winding up in student loan default.

When to Consolidate Your Student Loans

Like refinancing, the best time to consolidate your student loans is after you’ve built a good credit history, made several successful repayments, and are earning a stable income. Again, like refinancing, this can earn you a lower interest rate when you consolidate your loans. Therefore, right after graduation is probably not the best time to consolidate. Additionally, if you’re close to paying off your loans, there’s not a major benefit to consolidating.

How to Consolidate Your Student Loans

Depending on the loan source, you can either consolidate through the government or a private lender.

Consolidating Federal Loans

Unlike refinancing, federal loans can be consolidated. A Federal Consolidation Loan merges multiple federal student loans into a single loan. The interest rate of a Federal Consolidation Loan will be the average interest rate of your federal loans. Depending on your loan rates and amounts, you could reduce your rate. Also, it’s definitely more convenient and less stressful.

While most federal loans are eligible to be consolidated, a few are not—the Parent PLUS Loan isn’t eligible, for example. There are a couple other drawbacks as well. Consolidating federal loans can strip them of federal benefits, like a grace period or forgiveness.

However, you can choose to consolidate some, but not all, of your federal loans. This is an ideal option for students who want to minimize their stress, but maintain certain federal benefits.

Consolidating Private Loans

With private loan consolidation, there is no one rule governing eligibility or requirements. Every lender has their own stipulations regarding consolidation. Some lenders may require you to borrow a minimum amount to qualify, while others may assess your creditworthiness before approving of your consolidation application. Since there are many options, shopping around is strongly encouraged.

One of the potential benefits of private loan consolidation is that if you have a solid credit history and are earning a regular income, you could qualify for a lower rate of interest with your consolidated loan.

Consolidating Both Federal and Private Loans

While not all private lenders give you the option to combine federal and private student loans when consolidating, there are some that will—like Laurel Road. Opting to bundle both types of loans together can not only save you money in the long-run, but it will likely help you secure a lower interest rate for the combined loan amount. (Remember: You will lose federal loan benefits if you consolidate through a private lender).

Is Consolidation Right for You?

After learning about consolidation, ask yourself these questions:

  • Did I take out multiple student loans?
  • Do I want a lower interest rate?
  • Do I want lower monthly payments?
  • Am I willing to give up federal benefits for any of the above?
  • Am I having a hard time staying on top of my payments?
  • Am I having a hard time keeping track of my various loan terms?
  • Do I have good credit / can I build good credit?
  • Do I have a steady income?

If you answered “yes” to a majority of these questions, you should definitely consider consolidating your loans.

How to Pick the Right Student Loan Lender to Refinance or Consolidate

To ensure you’re picking the right lender and getting the best deal, we’d recommend that you evaluate potential lenders based on the following criteria:

  • Interest Rates
  • Loan Terms
  • Repayment Flexibility
  • Application Process
  • Customer Service
  • Borrower Protections

Interest Rates

The first thing you’ll want to know about a potential refinancing lender is what interest rate they will offer you. And rightfully so, because a great rate could save you tons of money on your student loans both by lowering your monthly payment and making it easier for you to pay off your loans more quickly.

Repayment Flexibility

One intimidating thing about student loan refinance is choosing the terms of your repayment. Should you commit to paying more each month in order to pay them off more quickly? Or should you spread out your repayment schedule to give your monthly budget some wiggle room?

Ultimately, this decision depends on your financial situation, but having flexible options can be a lifesaver if your situation changes or you need to adjust your payment schedule a few years down the line.

Application Process

Once you’ve nailed down the specifics of refinancing your student loan, you’ll still be facing a process of applying, being approved, and receiving the funds. Some lenders have an easier process than others but all will require a credit score and current loan information.

Customer Service

We’ve all heard (or lived through) horror stories about terrible customer service from some student loan lenders. Student loans are already stressful enough, and you don’t want to add shoddy customer service on top of that. Ask around and look for lenders who are friendly, responsive, and helpful.

Borrower Protections

As a general rule, it’s nice to have a backup plan whenever possible. Many lenders offer protections against unemployment or other financial hardship, which can help you in case you’re having trouble making your student loan payments.

That’s a lot of things to compare and contrast. Fortunately, College Raptor’s already done all that for you and picked six of the best lenders out there. See the below table for current loan rates at these top lenders, and click here to learn more specifics about each company.

Allison Wignall

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