Student Loan Refinancing and Consolidation Explained

Do you wish you didn’t have student loans? While they haven’t yet created a time machine that will allow you to go back and not borrow all that money for your degree, there are ways that you can make your debt more manageable. Two of those ways are to either consolidate or refinance your student loans.

Not sure which one is right for you? Don’t worry, we’ll help you figure it out.

Private Student Loan Refinancing Explained

So, what is private student loan refinancing? The first thing you should know is that while it is done through a ‘private’ loan, you can refinance both your federal and your private student loans. Lenders such as Splash Financial offer rates as low as 3.25% Fixed APR* which can save borrowers money over the life of the loan.

Essentially what happens when you refinance your student loans is that you take out a new loan that pays off all your other loans. You can choose which loans you want to refinance. Usually, you would refinance your loans because you want a lower interest rate than you’re currently paying, or you want to change your loan term length to give you longer terms or shorter terms.

Refinancing your student loans can potentially change your monthly payment significantly and can allow you to save money on interest over the life of your loan. Some people also refinance their loan in order to remove the co-signer from their loans because they’re now able to qualify for student loans on their own.

You might be wondering how difficult it is to qualify to refinance your loans. The good news is that if you have a job that pays decently and good credit then you should have no problem refinancing your loans at a lower rate. However, if you don’t have a great job or if your credit isn’t ideal, you might want to wait until those things improve before refinancing so that you can get a better deal.

Federal Student Loan Consolidation Explained

If you have federal student loans, you likely have multiple loans you have to pay each month. It can be time consuming to keep track of all those separate loans and their separate interest rates. You might wonder why your student loan servicer can’t just put them all together into one big loan. They can – through student loan consolidation.

Essentially, student loan consolidation allows you to bundle all your current federal student loans into one loan and extend your repayment term up to 30 years. This makes it easier to keep track of it, but it also allows you to qualify for various income-based repayment programs. These programs limit the amount that you pay towards your debt each month to anywhere from 10% to 20% of your salary and allow you to have your student loans forgiven after 20 to 25 years of on-time payments.

When you consolidate your student loans, your new interest rate is weighted based on your old interest rates and rounded up to the nearest half a percent – which means that if you had one loan that was for $10,000 and charged you 5% interest and another loan that was for $10,000 and charged you 6% interest, your new interest rate would be 5.5%.

Depending on the loans you have, you should consider whether consolidating your loans is a good idea as you can lose some benefits from Perkins loans like forgiveness options or not having to pay interest during the deferment if you consolidate them. The good news is you get to choose which loans you consolidate and you don’t have to consolidate all of your loans.

Similarities and Differences

While both types of student loan interventions can give you just one loan to keep track of, ultimately they have very different outcomes.

While you can reduce your monthly payment and change the term length of your loan by signing up for income-based repayment options after you consolidate your loan, you won’t be able to reduce your interest rate like you would be able to if you refinanced your student loans. You also might not save money depending on your specific situation since by making your loan over a longer period of time you could end up paying more interest over the life of your loan.

In comparison, you will likely save money and potentially reduce your monthly payment if you refinance your student loans at a lower rate. One benefit of refinancing your student loans is that you can refinance both your private and federal loans together, but that’s also a drawback since you’ll likely lose some of the protections that you get on federal student loans. Private refinance lenders do not have forgiveness options or income-based repayment options and while they sometimes have deferment options, their version of deferment might not be the same as your federal loans currently offer.

Another difference is that some private student loan refinance options have origination fees and pre-payment fees, but not all do. If you are going to refinance, be sure to look for options that don’t charge fees if you want to save.

What’s Right for You

Ultimately, it comes down to is what is right for you. If you’re not sure when you’ll be able to repay your student loans, it might make sense to consolidate your federal loans and refinance your private loans. If you want to quickly pay off all your student loans within the next year or two and you don’t expect to struggle to make payments, you might want to refinance all your debt with a private loan at a lower interest rate since it will ultimately be cheaper to do so.