If you took out both federal student loans and private loans to pay for your education, you might think that these will always be separate bills with multiple servicers. However, refinancing options offered by private lenders now make it possible to consolidate federal and private loans into one loan and payment. While refinancing with a private lender may not be right for everyone, understanding all the repayment options available is key to making the right choice.
What is the Difference Between Student Loan Consolidation and Refinancing?
While often discussed in the same breath, student loan debt consolidation and refinancing are two very different things.
What is Student Loan Consolidation?
Student loan consolidation combines multiple loans into one new loan with new loan terms and a single payment. Consolidating your loans means you won’t have to juggle different payment times and amounts, streamlining the process. Your consolidated interest rate would be the weighted average of all the interest rates of the loans you are combining. A Direct Consolidation Loan is a government loan from the Department of Education that allows you to combine multiple federal student loans into a single loan with one loan servicer, but private loans cannot be included in the bundle.
What is Student Loan Refinancing?
Refinancing is revising the interest rate of your loan (or multiple loans) to a new rate. This is a popular option for college graduates because they may not have received a great interest rate when applying for their student loans. Refinancing allows the borrower to receive a rate that better reflects their improved financial standing and credit score, rewarding you for your hard work!
Refinancing is done with a private lender, not the federal government. At Earnest, we can take all of your loans (private and/or federal direct loans) and consolidate them into one when you refinance. The end result is a loan with a single, better interest rate based on your financial potential.
With a lower interest rate you will be able to either pay less each month or pay down the loan more quickly, spending less in interest over the life of the loan.
Borrowers can select either a fixed interest rate, or a variable rate, while federal loans are only fixed rate. If you borrowed with a cosigner you can also release them from the loan obligation when you refinance.
Check our student loan calculator to compare your rates now.
The Pros and Cons of Consolidating Student Loans
If you only have federal student loans and do not want to refinance, you can consolidate these loans through the Federal Direct Consolidation Loan program. According to the Federal Student Aid office, the following loans are eligible for consolidation:
- Subsidized Federal Stafford Loans
- Unsubsidized Federal Stafford Loans
- PLUS loans from the Federal Family Education Loan (FFEL) Program
- Supplemental Loans for Students
- Federal Perkins Loans
- Nursing Student Loans
- Nurse Faculty Loans
- Health Education Assistance Loans
- Health Professions Student Loans
- Loans for Disadvantaged Students
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct PLUS Loans
- FFEL Consolidation Loans and Direct Consolidation Loans (but only under certain conditions)
If your loan is one of the many listed above, you have options! But just because you can consolidate your federal loans through the Federal Direct Consolidation Loan program, does that mean you should?
Pros of a Direct Consolidation Loan for Federal Student Loans
- Your loans will now be repackaged into a single monthly payment.
- Continued access to repayment benefit programs such as Teacher Loan Forgiveness or Public Service Loan Forgiveness.
- Consolidation can lower your monthly bill.
- There is no origination fee when you consolidate with the federal government.
Cons of a Direct Consolidation Loan for Federal Student Loans
- You will lose credit for any payments made towards income-driven repayment plan forgiveness or Public Service Loan Forgiveness before you consolidated your federal loans.
- While your monthly bill might be lower, you could end up with a longer timeline for your loan, and spending more on interest payments over the life of the loan.
- Your new interest rate will be the weighted average of the existing loan rates, not a revised rate that reflects your current credit score.
- Some benefits like interest rate discounts, principal rebates, repayment terms, or loan cancellation benefits might no longer be accessible after consolidation.
To learn more check out Federal Student Loan Consolidating and Refinancing 101.
The Pros and Cons of Refinancing Private Student Loans
If you have a mix of private and federal loans that you would like to consolidate and refinance, you will need to look to a private lender.
Pros of Refinancing Private Student Loans
- Simplifying your statements into a single payment.
- You may qualify for a lower interest rate, which will save you money in interest payments over the life of the loan.
- You may have lower monthly payments to free up cash flow in your budget.
- Many private lenders offer more flexible repayment options.
Cons of Refinancing Private Student Loans
- Income-driven repayment plans will no longer be an option when you refinance with a private lender.
- If you are in deferment you will start your repayment period when you refinance.
- You will no longer have access to federal loan forgiveness programs.
- Some private lenders will charge an origination fee (Earnest does not).
Does Student Loan Refinancing Make Sense For Me?
Like any financial decision, it depends on each person’s situation if refinancing makes sense for them. If you are currently utilizing a number of benefits through the federal government for your loans, and these benefits outweigh a potentially lower interest rate, then refinancing might not be a great option for you. Consolidating your loans might still be a solid option for federal student loan holders looking to simplify their repayment process.
If you are not in a position to benefit from these programs, and you have improved your financial standing with a strong credit history since graduation, private consolidation and then refinancing to a lower interest rate with a lender like Earnest could be a great way to save time and money on your student loan debt.
This article was written by Carolyn Pairitz Morris, Senior Editor at Earnest.