Student Loans: What Is Consolidation Vs. Student Loan Refinancing?
When it comes to student loans, this is one of the biggest choices.
Student loan consolidation or student loan refinancing?
The decision is an important one, and could mean tens of thousands of dollars in savings.
Here’s what you need to know and how to make it happen.
Student Loan Consolidation: The Basics
According to Make Lemonade, the latest student loan statistics for 2018 show that there are more than 44 million borrowers who collectively owe $1.5 trillion in student loan debt.
So, it’s time to take action.
When it comes to student loan consolidation, you have two choices:
- Federal Student Loan Consolidation: Direct Consolidation Loan through the federal government, or
- Private Student Loan Consolidation: Refinance student loans with a private lender
While each strategy has merit, they approach student loan consolidation differently. Here are the main differences between federal student loan consolidation and student loan refinancing.
Eligible Loans For Student Loan Consolidation
1. Student Loan Consolidation with the federal government
Federal student loans are the only student loans eligible for a Direct Loan Consolidation. This includes:
- Federal Direct Subsidized Stafford / Direct Loans
- Federal Direct Unsubsidized Stafford / Direct Loans
- Federal Direct PLUS Loans
- Federal Direct Consolidation Loans
- Federal Family Education Loans (FFEL)
Importantly, private student loans are not eligible for a Direct Consolidation Loan.
2. Student Loan Refinancing
With student loan refinancing, both federal and private student loans are eligible. You can choose to refinance federal student loans, private student loans or both.
With student loan refinance, you combine one, some or all your existing student loans into a single student loan. This new student loan is a private student loan that replaces your old student loans.
Interest Rates: Student Loan Consolidation and Student Loan Refinancing
1. Student Loan Consolidation: With federal student loan consolidation, your interest rate does not decrease. Rather, it is equal to a weighted average of the interest rates on your existing federal student loans rounded up to the nearest 1/8%.
The goal of federal student loan consolidation is an organizational tool. It simplifies your federal student loans and combines them into a Direct Consolidation Loan.
2. Student Loan Refinancing: When you refinance student loans, you receive a new interest rate that is lower than the interest rates on your current student loans. If you have a strong credit profile and income, you may qualify for a lower interest rate, which could potentially save you thousands or tens of thousands of dollars on your student loans.
With student loan refinancing, the result is a new student loan with a lower interest rate, single monthly payment and single student loan servicer. You can also choose a fixed or variable interest rate.
Student Loan Repayment: Student Loan Consolidation and Student Loan Refinancing
Federal student loan consolidation and private student loan consolidation offer different options for your loan term for student loan repayment.
1. Student Loan Consolidation: With federal student loan consolidation, the standard repayment term is 10 years. There are also income-driven repayment plans such as PAYE or REPAYE that can extend your repayment term to 20 or 25 years.
2. Student Loan Refinancing: While it varies by lender, student loan refinancing offers more options for loan terms for student loan repayment.
Most student loan refinancing lenders allow you to repay your student loans over 5, 7, 10, 15 and 20 years. If you want to pay off your student loans as quickly as possible, you’re better off choosing a shorter student loan repayment term. If you want more time to pay off your student loans, you can choose a longer repayment loan term.
Shorter Repayment Term: higher monthly payment; less interest; pay off student loans faster
Longer Repayment Term: lower monthly payment; more interest; pay off student loans slower
Should I Consolidate My Student Loans?
Here are the main reasons to consolidate student loans with a Direct Consolidation Loan:
- Organize and simplify student loan payments: If you have multiple federal student loans, a Direct Consolidation Loan can provide you with a single, monthly student loan payment. You’ll also have one payment date and student loan servicer.
- Participate in income-driven repayment plans: If you plan to use an income-driven repayment plan for your federal student loans such as PAYE, REPAYE, IBR or ICR, for example, you may choose to consolidate your federal student loans.
- Other federal benefits: There are certain benefits associated with federal student loans such as deferral and forbearance.
Should I Refinance My Student Loans?
Student loan refinancing also simplifies your financial life with one monthly payment, one student loan servicer and, most importantly, a lower interest rate.
Unlike federal student loan consolidation, only student loan refinancing can earn you a lower interest rate. A lower interest rate can mean big savings on your total student loan cost and help you pay off your student loans faster.
The main reasons to refinance student loans include:
- You want to lower your interest rate and save money
- You have a strong credit score and stable income
- You want to pay off your student loans faster
- You want the flexibility of a fixed or variable interest rate
- You don’t plan to use public service loan forgiveness or income-driven repayment plans
- You have a strong credit history and are financially responsible
Is Consolidation Or Refinancing Better?
Here’s a quick summary to help you make a more informed decision:
- Direct Consolidation: organizational tool; same or slightly higher interest rate; federal repayment plans
- Student Loan Refinancing: organizational tool; lower interest rate; flexibility; save money; pay off student loans faster
This refinancing vs consolidation student loan calculator shows you the total costs of your student loans under each scenario and how much money you can save.