Refinance or consolidate student loans?
Student loan consolidation and refinancing have one result in common: You end up with a single monthly payment that鈥檚 a lot easier to keep track of than separate bills from multiple loan servicers.
Which route you take depends on your circumstances. If you have strong credit and want to pay off your loans as quickly as possible, look at refinancing. If hanging onto your federal loan benefits is your top priority, consolidating is the way to go.
Our breakdown of both approaches will arm you with the information you need to make the best decision.
The basics: Consolidation
You might hear 鈥渃onsolidation鈥� and 鈥渞efinancing鈥� used synonymously. But at NerdWallet, we refer to聽聽only when we describe the process of combining your federal student loans into a single Direct Consolidation Loan. Here鈥檚 what happens when you consolidate:
- The government pays off your individual loans and combines those balances into a new one. So if you have three Stafford loans of $1,000, $5,000 and $7,500, you鈥檒l receive a $13,500 Direct Consolidation Loan. You鈥檒l pay it off for 15 years, but the term can range from 10 to 30 years, depending on your balance.
- Your new interest rate will be the weighted average of all your prior rates. That means that in its final calculation, the government will more heavily weigh the interest rate on a large loan balance than on a small loan.
- That new interest rate won鈥檛 be a straight average, though. It鈥檚 rounded up to the nearest one-eighth of 1%. It will also be fixed, meaning it will stay the same each year you pay down the loan.
You鈥檒l make one monthly payment to your聽, and you鈥檒l keep all the benefits that come with federal student loans. You can temporarily halt your payments under certain circumstances, and you鈥檒l have access to income-driven repayment plans. Additionally, if you work full-time in public service, you can get the remaining balance on your loans forgiven after you make 120 qualifying payments.
Remember: Consolidating your loans with the federal government is free. If you see an ad, receive a letter or get a phone call from a company that charges you a fee to consolidate, don鈥檛 respond. Consolidate your loans through聽聽or by calling the federal Loan Consolidation Information Call Center at 1-800-557-7392.
The basics: Refinancing
When you refinance federal loans, a private lender pays them off and issues you a new loan equal to your previous balances, similar to the consolidation process. But that鈥檚 where the similarities end. Here鈥檚 how it works:
- Refinancing federal loans turns them into a private loan. You won鈥檛 have the opportunity to take advantage of federal loan protections, since the government will no longer own your student loans.
- Your new lender will determine your interest rate based on your credit score and other requirements, such as your income and job history. Many lenders also have minimum and maximum loan balance guidelines.
- You can use a co-signer to get a better interest rate than you would on your own, or if your credit score is lower than the minimum required. NerdWallet鈥檚 refinancing partner聽聽suggests you have a score of at least 680.
If you have built up strong credit, have a steady employment history and have earned a good income in the years after graduation, you might be able to lower your interest rate by refinancing your original loan. Keep in mind that you鈥檒l maximize your interest savings if you choose as short a repayment term as you can manage; many lenders offer five-, 10-, 15- and 20-year loan terms.
Most lenders will allow you to choose between a fixed interest rate, which stays the same year after year, and a variable rate, which increases or decreases according to market conditions. Refinancing lender CommonBond also offers a 10-year hybrid loan, which has a fixed interest rate for the first half of your loan term and a variable rate for the second half.
鈥淚f you鈥檙e thinking you鈥檙e going to pay these off quickly, like in five years, going with a variable [interest rate] isn鈥檛 as much of a risk as if you were on a long-term repayment schedule,鈥� says Jill Stone, director of financial aid at Yale Law School.
But in the end, it comes down to personal preference, she says. 鈥淚f you鈥檙e the kind of person that鈥檚 really debt-averse and really risk-averse, you want the fixed interest rate even though that鈥檚 going to cost you more money over the long term.鈥�
Which is best for you?
Borrowers who qualify for refinancing should first consider whether they鈥檒l want to take advantage of federal loan protections, Stone says. They鈥檒l keep those benefits if they consolidate, but lose them if they refinance.
鈥淐onsolidation would only make sense if they are interested in Public Service Loan Forgiveness or if they were just very concerned about having deferment and forbearance options in the background,鈥� Stone says.
Learn about聽听补苍诲听, two ways you can temporarily postpone your federal student loans if you鈥檙e having trouble making payments, in NerdWallet Student Loan Central.
Another key difference between consolidation and refinancing: the interest rate you鈥檒l get. Consolidating your loans won鈥檛 save you money over time; in fact, you might pay more in total interest if you extend your repayment term. Refinancing, on the other hand, offers the potential to pay a lower interest rate if you have strong credit.
The amount of time you plan to spend paying down your loans should also influence your course of action. Refinancing with a variable interest rate, as opposed to consolidating with a fixed rate, makes more sense for grads who plan to get rid of their loans sooner.
What鈥檚 next?
Consolidation:聽Apply to consolidate your loans for free through Federal Student Aid at.听聽will walk you through the process step by step.
Refinancing:聽At NerdWallet鈥檚 partner Credible, an online loan marketplace, you can compare refinancing offers from up to nine lenders at once.
To get started, follow the link below to fill out a short form with your current loan information:聽
.
Next, complete a longer form on Credible鈥檚 website, where you鈥檒l see actual loan offers based on your financial information. There, you鈥檒l pick the refinancing lender and interest rate that鈥檚 best for you.
This article first appeared at
