Refinance or consolidate student loans?

Consolidating or refinancing can help keep things simple when it comes to paying off your student debt. This article will help you decide which route to go.

Melanie Stetson Freeman/The Christian Science Monitor/File
Beth Byrne signs papers to refinance the mortgage on her home.

Student loan consolidation and refinancing have one result in common: You end up with a single monthly payment that’s 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 “consolidation” and “refinancing” used synonymously. But at NerdWallet, we refer to consolidation only when we describe the process of combining your federal student loans into a single Direct Consolidation Loan. Here’s 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’ll receive a $13,500 Direct Consolidation Loan. You’ll 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’t be a straight average, though. It’s 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’ll make one monthly payment to your student loan servicer, and you’ll keep all the benefits that come with federal student loans. You can temporarily halt your payments under certain circumstances, and you’ll 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’t respond. Consolidate your loans through 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’s where the similarities end. Here’s how it works:

  • Refinancing federal loans turns them into a private loan. You won’t 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’s refinancing partner Credible 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’ll 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.

“If you’re thinking you’re going to pay these off quickly, like in five years, going with a variable [interest rate] isn’t as much of a risk as if you were on a long-term repayment schedule,” says Jill Stone, director of financial aid at Yale Law School.

But in the end, it comes down to personal preference, she says. “If you’re the kind of person that’s really debt-averse and really risk-averse, you want the fixed interest rate even though that’s going to cost you more money over the long term.”

Which is best for you?

Borrowers who qualify for refinancing should first consider whether they’ll want to take advantage of federal loan protections, Stone says. They’ll keep those benefits if they consolidate, but lose them if they refinance.

“Consolidation 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,” Stone says.

Learn about deferment and forbearance, two ways you can temporarily postpone your federal student loans if you’re having trouble making payments, in NerdWallet Student Loan Central.

Another key difference between consolidation and refinancing: the interest rate you’ll get. Consolidating your loans won’t 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’s next?

Consolidation: Apply to consolidate your loans for free through Federal Student Aid atstudentloans.govNerdWallet’s Guide to Consolidating Student Loans will walk you through the process step by step.

Refinancing: At NerdWallet’s 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: 

Estimate your refinancing savings.

Next, complete a longer form on Credible’s website, where you’ll see actual loan offers based on your financial information. There, you’ll pick the refinancing lender and interest rate that’s best for you.

This article first appeared at NerdWallet.

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