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Refinancing and Consolidating Student Loans

By the time you graduated from your baccalaureate program, how many student loans had you accumulated? If the answer is more than one, you may have multiple loan providers and repayment schedules. Add in graduate school and more loans, and, balancing all these different payment schedules—not to mention making all those payments—might be a challenge. If that’s the case for you, you may be interested in refinancing or consolidating your student loans.

Deciding Whether to Consolidate Student Loans

Whether to consolidate student loans is a big decision, with several factors to consider. This might include the amount of debt you have, your current and near future income and financial situation, the number and terms of separate loans you currently have, and your personal preferences, to name a few. Once you consolidate, though, there’s no going back, so it’s important to look at your options. Here’s a brief guide to some basic considerations when deciding whether or how to consolidate student loans.

Your Current Finances

Each of your student loans, particularly federal student loans, may have different repayment, deferment, and forbearance options, aimed to help you repay your student loan debt in a way that is convenient for you. But if you have multiple payments to make each month, that might add up. If your income currently and in the near future is low enough to make repayment difficult, consolidation might be an appealing option. Consolidation loans might combine any compatible loans into one payment, possibly even with a lower interest rate and lower monthly obligations. Why might it be lower? Because consolidation loans might allow you to pay off your student loans over a longer period of time, should you qualify, adjusting the minimum monthly payment accordingly.

Your Long Term Finances

While lower minimum monthly payments might be an attractive option, there may be drawbacks to this. That’s because the longer it takes to repay a loan, the longer there is for interest to accrue on the outstanding amount. Depending on your student loan terms, such as whether you are subject to capital interest, you might be required to pay interest on the interest that has already accrued. If you can afford to continue making sufficient monthly payments on each of your outstanding loans, you might pay less money in the long run than if you consolidated.

Different Loan Terms

If you are eligible and choose to consolidate your student debt, you may be subject to new loan terms. Depending what those terms are, that might be a positive or negative. For example, if your original loans had flexible repayment options that you couldn’t get with the consolidation loan, you might lose access to that benefit. Make sure you familiarize yourself with all your benefits and options, both on your current loans and the potential consolidation loan, to make sure you’re not losing something you would rather keep. On the other hand, your consolidation loan might have new benefits that make up for the ones you lose. You might be able to consolidate under a lower fixed interest rate. If interest skyrockets, you’ll get to keep your lower rate. Of course if interest drops below your fixed rate, you might be stuck with the higher amount. As mentioned above, other potential benefits of consolidation might include lower minimum monthly payments and longer repayment periods, making repayment easier in the short term. Plus, once you’re able to do so comfortably, you might later be able to increase your payments and repay your consolidation loan faster, depending on the terms of your loan.

Convenience

At the end of the day, depending on your situation, consolidation might just be the more convenient option. Reducing your student loan payments each month from several to one might be easier for you to remember, not to mention easier to budget. Even if you pay more long term, you might decide that easing up your budget in the short term is enough of a benefit to make up for the increased duration. Whether it’s a matter of how far you can stretch your paycheck, wanting to increase your savings, or just your personal preference, the convenience of a consolidation loan might be a major factor in your decision.

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Consolidating Student Loans and Refinancing Student Loans

Student loan consolidation, in plain terms, is an option for combining several compatible student loans into one single loan. This is done through a new loan, which is used to pay off the student loans you want to consolidate, satisfying those requirements and assuming that debt. This new loan might have different terms, such as a different interest rate, different repayment terms, and other factors. Refinancing student loans, a term sometimes used interchangeably with consolidation within the context of student loans, is a service only offered by private lenders and banks. In some cases, private lenders and banks might allow borrowers to refinance student loans individually rather than consolidating several; in other cases, the process of refinancing may be quite similar to consolidation.

Federal Student Loan Consolidation

If you have taken out federal student loans, such as Direct Stafford Loans, Direct PLUS Loans, or Perkins loans, you might qualify to consolidate some or all of those with a Federal Direct Consolidation Loan. A Direct Consolidation Loan, conducted through the U.S. Department of Education, may be able to combine your eligible loans into a single loan under a new fixed interest rate, with new repayment terms and amounts.

If you choose to apply to consolidate your Federal Direct Loans and are eligible, this might reduce the minimum monthly payment, compared to pre-consolidation, through what is typically a lower interest rate and an extended repayment period. Federal Direct Student Loans do not include an application fee. There are also no penalties for prepayment.

However, if you choose to do so, you may lose access to borrower benefits associated with the original loans, as well as pay more money over the life of the loan.

Private Student Loan Consolidation

If you are considering private student loan consolidation, a number of factors may influence your decision to apply. Since you may have several different private lenders for your potential consolidation, you may want to evaluate the interest rates for your current loans and potential consolidation loans. In addition, you may want to look at whether the rate is fixed or variable, and whether the rate is capped and at what amount. Some private student loan consolidation services might incorporate application or origination fees. Depending on the arrangement, the amount you pay each month may vary, as may the total amount you might pay over the life of the loan. Finally, remember that your credit history might be taken into account, possibly necessitating a cosigner, depending on the individual circumstances.

The number of options available mean that, if you want to refinance or consolidate private student loans, you may be able to shop around, comparing the benefits of each contender not only to your current loans but to other potential options.