Student Loan Consolidation And Refinancing – What Is The Difference?
Consolidation or refinancing your student loans may be the solution to making your loan payments more manageable. Find out what they are and their differences below.
Table of Contents
- Student Loan Consolidation
- Student Loan Refinancing
- Consolidation vs Refinancing - Which is Better?
- Factors to Consider
- Final Thoughts
Student loan consolidation and refinancing are two financial solutions with one fundamental similarity that makes people think they are the same: They both allow you to combine all your loans into a new loan with new repayment terms to make your debt less overwhelming. Although both options can make your monthly payments more manageable, especially if you have multiple loans, they are also very different. Their distinctions make picking the right solution for you much more successful.
As you embark on the journey of better managing your debt, it is crucial to understand if you qualify for refinancing or consolidation, and how each option will affect your interest rate, loan terms, and monthly payments.
Student Loan Consolidation
Student loan consolidation combines all your federal student loans into a new loan with new repayment terms. In other words, when you consolidate, the government pays off your existing federal student loans in exchange for a new direct consolidation loan. Federal student loan consolidation gives you a repayment term between 10 to 30 years at a fixed rate.
Pros & Cons of Consolidation
Borrowers opt for student loan consolidation for various reasons. Consider the following potential benefits and drawbacks before making your own decision:
- Access to a fixed interest rate
A direct consolidation loan gives you the opportunity to replace a variable interest rate with a fixed interest rate with no additional fees.
- Combines all your loans into one
Consolidation makes tracking all your monthly loan payments easier by reducing the number of loan servicers and payments to just one.
- Longer repayment terms
A direct consolidation loan can extend your repayment plan to 30 years, considerably reducing your monthly payments.
- Good co-signer release policies
With direct consolidation loans, you can take on full responsibility for your loan and release your co-signer without additional charges or fees.
- You may end up paying more interest
Although extending your loan term will reduce your monthly payments, you may pay more interest over time and be in much debt longer.
- The loan principal will be higher
Any unpaid interest on your student loans will be added to the principal loan when you consolidate. As a result, your balance will be higher.
- Higher interest rate
Direct consolidation loans are not eligible for interest rate discounts. This means that the interest rate is determined by the weighted average of all the interest rates of the loans being consolidated, which may be higher than what an individual could get on their own
- You may lose certain federal loan benefits
Consolidating your student loans cancels the credit you have gained while paying for your loans under the income-driven repayment plan. This makes it hard to qualify for forgiveness programs such as the Public Service Loan Forgiveness (PSLF) Program.
How to Apply for Consolidation
Federal student loan consolidation does not require a credit check, so your credit score doesn’t affect your eligibility. You can apply for student loan consolidation using the following steps:
- Log into your student aid account, and click “Direct Consolidation Loan Application and Promissory Note.”
- Provide the following information:
- The loans you want to consolidate,
- Your preferred repayment plan, and loan servicer
- Personal data (contact information, ID, and employer’s details)
- Name and contact information of two references
- Read the terms and conditions
- Review your applications and sign
- Do it in one session; there is no save and come back later option
- Continue your monthly payments as usual until you get an approval
Student Loan Refinancing
In contrast to consolidation, student loan refinancing is when a private lender pays off your private and federal student loans in exchange for a new loan with new repayment terms and interest rates. Your credit score, income, and debt-to-income ratio determine the terms and rates you will receive.
Pros & Cons of Refinancing
Borrowers decide to refinance their student loan for a number of reasons. Consider the following potential benefits and drawbacks before making your own decision:
- You can get a much lower interest rate
Refinancing is a merit-based solution: If you have a strong credit score and a low debt-to-income ratio, you will likely get much better repayment terms and a favorable interest rate.
- You can apply with a co-signer
In the event that your credit score alone is not enough to get approved for refinancing, you can apply with a co-signer. A co-signer with a strong credit history can ensure that you get low-interest rates.
- All your loans are combined into one
Keeping track of multiple payments every month makes it hard to effectively manage your debt which could lead to defaulting. Refinancing eliminates this risk, as you are now able to stay on top of just one payment.
- You can refinance with a lender of your choice
With private student loans, multiple lenders offer different refinancing options at your disposal. The freedom to choose your loan servicer without restrictions ensures you get the best repayment terms and interest rates for your needs.
- It is hard to qualify
Most lenders require a minimum credit score of 650 and a debt-to-income ratio of less than 50% to qualify. Most people, especially new graduates, find that this is a tough requirement to meet.
- You will no longer be eligible for federal benefits
Private student loans are not eligible for student loan forgiveness programs, income-driven repayment plans, deferment, or forbearance. Although private lenders have options to make your loan more manageable, they do not offer the same level of protection as the government.
- A credit check is required
Private lenders conduct a hard credit check to evaluate your credit history and application. Too many hard credit checks can negatively affect your credit score.
- Repayment terms are dependent on your credit score
People refinance student loans to reduce the interest rate; however, this is not assured. A high credit score is the only way to secure low rates.
How to Apply for Refinancing
Step 1: Research different lenders
Various lenders offer student loan refinancing, including banks, online financial institutions, and credit unions. Compare their repayment terms, eligibility requirements, and loan limit before choosing one.
Following are 6 options for companies that refinance student loans.
|Lender||Scholaroo||Our view||Fixed rates||Variable rates||Learn more|
|Best for Low Interest Rates with Discounts||4.99%||4.74%||Visit website|
|Best for Flexible Repayment Options||5.99%||5.99%||Visit website|
|Best for Refinancing Parent Plus Loans||4.99%||5.99%||Visit website|
|Best for Refinancing without Cosigner||4.96%||5.32%||Visit website|
|Best for Mid-Income Earners||4.49%||5.02%||Visit website|
ISL Education Lending
|Best for In-School Refinancing||6.50%||N/A||Visit website|
Step 2: Request a pre-qualification
Once you have picked your lender, ask them to conduct a pre-qualification to get an estimate of the rates and terms you qualify for before proceeding with the application.
Step 3: Complete the application
In addition to your credit score, most lenders require the following information:
- Proof of employment
- Debt-to-income ratio
- A degree
- Loan and payment information
- Official ID
- Proof of residency
Step 4: Keep making payments as usual
Don’t stop your monthly payments until your new lender has fully repaid your loans.
Consolidation vs Refinancing - Which is Better?
|Eligible loans||Federal loans only||Federal and private loans both|
|Can I lower my interest rates?||No||Yes|
|Credit Check||Not required||Required|
|Will I save money?||Generally no. If you extend the loan term, it may lower your payments but your overall interest amount will increase.||Yes|
|Will I have access to loan protections, repayment options, and forgiveness programs relating to federal loans?||Yes||No|
|Will there be one monthly bill?||Yes||Yes|
Consolidation is often seen as a good option for those who are struggling to make payments on their loans, but refinancing may be the best choice for those who have improved their credit score and can qualify for a lower interest rate. Refinancing also has the potential of saving you thousands of dollars over the life of your loan if you can secure a lower interest rate.
Additionally, refinancing may also allow you to extend the repayment timeline or change your payment plan. There is also the option of combining consolidation and refinancing by first consolidating multiple loans into one loan, then refinancing that loan for a lower rate. Make sure to carefully weigh all of the options available before deciding which one is right for you.
Who Should Opt for Student Loan Consolidation
A good option for borrowers who:
- Have federal student loans
- Have a low credit score
- Want to lower monthly payments
- An income that is not secure as a result needs the protection of federal loan benefits available to consolidated loans such as deferment and forbearance
Who Should Opt for Student Loan Refinancing
Suitable for borrowers who:
- Have a high credit score
- Have both federal and private loans
- A stable income will ensure that they don’t need to apply for deferment, forbearance, or loan forgiveness to avoid defaulting.
- Their goal is to lower the interest rate
Factors to Consider When Choosing Student Loan Consolidation vs Refinancing
Before making your final decision as to whether you will opt for consolidating your student loans or refinancing them, keep the following factors in mind as a guideline:
Knowing your financial goals and situation is critical as you consider consolidating or refinancing your student loans. Are you looking to reduce monthly payments by extending the loan terms or pay off your debt faster by lowering interest? Also, keep in mind factors such as income, debt-to-income ratio, credit score, and current repayment terms as you decide.
Your chances of successfully refinancing your student loans depend on the hard credit check results. Know your credit score before applying for refinancing so that if your score is on the lower side, you can improve it beforehand.
Type of loan
Not all loans qualify for consolidation or refinancing. Consolidation works strictly with federal loans, while federal and private loans are eligible for refinancing. You can access information about your student loans by logging into studentaid.gov.
Consolidation and refinancing don’t both have interest rate benefits. Most of the time, you get a fixed but high-interest rate with consolidation. In contrast, with refinancing, your interest rate can be variable but considerably lower depending on your credit score.
Below are some FAQs relation to student loan consolidation and refinancing
Can you consolidate then refinance your student loans?
Yes. Your direct consolidated loan can be refinanced for a new loan with more favorable rates and terms.
What are the disadvantages of consolidation?
Consolidating your student loans could result in paying more interest, a higher principal and loss of federal loan benefits and protection.
Can I save money with loan consolidation?
With consolidation, you may pay more because any outstanding interests you had on your individual loan will be added to your new loan’s principal.
Student loan consolidation and refinancing improve your life quality by making your debt more manageable. However, paying attention to their distinctions is crucial to know under which circumstances they will be most beneficial. Use factors such as financial goals, credit score, the type of loan you have, as well as the interest rate to help guide your decision. In this way, you will gain the ability to take control of your financial situation and make a decision that benefits you in the long run.