Should I consolidate or refinance my student loans? At U‑fi Student Loans, we get this question daily and it’s one every person with student loan debt should ask themselves. Of course, the answer depends on your specific situation and is not always clear cut. In many cases it makes total sense, while in others it may not, or at least not right now.
Before thinking through the different options available, you should understand the difference between consolidation and refinancing.
When you consolidate your student loans through the federal government’s Direct Consolidation Loan program, you are combining several federal loans into one new loan. The new interest rate is the weighted average of the interest rates from the loans you are consolidating. With refinancing, you are actually paying off your federal and/or private student loans by taking out a new private loan that has a different interest rate and loan terms.
Now that you understand the basic difference between consolidation and refinancing, here are some things you should carefully consider:
1. Do you want to save money by lowering your overall costs?
Many people know a loan with a lower interest rate will cost less than a loan with a higher interest rate, all else being equal. But what many don’t realize is students who took out loans between 2006 and 2013 may be able to substantially lower the interest rate on those loans if they have good credit and refinance their loans during today’s historically low interest rate environment. Even if you are comfortably making your student loan payments, it’s smart to see if you can lower your interest rates and save on your total loan costs.
2. Are you making multiple monthly payments?
If you are making more than one monthly payment and want to simplify your life, loan consolidation or refinancing can help. However, if you have federal and private student loans and want to make only one monthly payment, your only option is refinancing since you cannot consolidate private loans through the Direct Consolidation Loan program.
3. Do you want to switch your interest rate from a variable to a fixed rate (or vice versa)?
When you took out your student loans, each loan had either a fixed or variable interest rate. Understanding what type of interest rates you have is important since it affects whether or not your monthly loan payments will fluctuate over time. If you have fixed rate loans your monthly payments will remain constant. With variable rate loans your monthly payments may change over time.
If you plan to pay off your loans over a shorter period of time, a variable rate loan could be a good option since the initial interest rate on a variable rate loan is typically less than on a fixed rate loan. However, the longer the repayment term, the greater the opportunity for variable interest rates to fluctuate. If rates rise, your monthly payment and total costs will rise as well.
4. Do you want to lock in a fixed monthly payment with a low interest rate?
If you prefer predictable payments that won’t change over time, then a fixed rate loan may be your best choice. With the low interest rate environment we are currently enjoying, you may be able to lock in a low fixed interest rate by refinancing. Your rate will depend on several factors, such as your credit, income, education level, the repayment term you select, and whether or not you have a cosigner.
5. Are your monthly payments weighing you down?
If you are having trouble making your monthly student loan payments, or just want to free up some extra cash, refinancing your loans can be a great option. Most private loan lenders offer repayment terms up to 20 years, with some like U‑fi offering a 25-year option. By increasing the length of your repayment period, you can lower your monthly payments. However, loans with longer repayment terms typically have higher interest rates than loans with shorter terms and you will likely end up paying more in total interest over the life of the loan.
6. Will you lose any features or benefits if you refinance or consolidate your loans?
Because you are replacing your loans with a new loan, it is important to understand you might lose benefits tied to your original loans. For example, federal loans offer a variety of deferment, forbearance, and repayment options to assist borrowers who cannot afford their monthly payments. Federal loans also offer benefits to military service members that may not be available with private loans. Your current loans may also have borrower benefits such as an interest rate discount. Be sure to compare the features and benefits of your new loan with any you might be giving up.
If the time is right to refinance your student loans, take a moment to review several lender websites and create a short list of top candidates. Call each candidate and ask them any questions you have, including what you will need to apply. Make sure you are speaking to the actual loan servicer as this is who you will be interacting with over the entire life of your new loan.