Should I consolidate or refinance my student loans?

Answer:

Consolidation combines loans into one monthly payment with one servicer. Consolidating your loans may make it easier to keep track of your loans if you have more than one student loan with more than one servicer or company.

There are two types of consolidation loans. The type of consolidation loans available to you depends on whether you have federal or private student loans.

Federal Direct Consolidation Loan

If you have federal student loans, you have the option to combine all or some of your federal student loans into a federal Direct Loan Consolidation. This option is only available to consolidate federal student loans and not private student loans. 

Federal loan consolidation will not lower your interest rate.  The fixed interest rate for a Direct Consolidation Loan is the weighted average of the interest rates of the loans being consolidated, rounded up to the nearest one-eighth of a percent. While consolidating your loans may slightly increase your interest rate, it will lock you into a fixed-interest rate so your new payment won’t change.

If you have federal loans originated under the Federal Family Educational Loan (FFEL) program or the Perkins loan program, you may be able to consolidate those loans into a new Direct Loan to qualify for Public Service Loan Forgiveness (PSLF).

You can learn more about what type of loan you have through the National Student Loan Data System (NSLDS), available at www.nslds.ed.gov. This database only contains information about federal student loans.

Private consolidation loan

If you have private or federal student loans, you have the option to combine all or some of your private student loans into one larger private consolidation loan through a private lender or bank.

If you are looking to lower your interest rate, lower your monthly payment by extending the repayment term, or seeking to release a co-signer from your student loan, some borrowers in repayment with excellent credit may be able to refinance or consolidate their existing private student loans under a new private loan with a lower interest rate.

You can consolidate federal or private student loans into one private consolidation loan. Consolidating federal student loans into a private consolidation loan has risks.

You should weigh the benefits and risks of refinancing your federal student loan into a private student loan with a lower rate, because changing from a federal to a private student loan eliminates some of these protections and benefits. 

  • Look closely if you are switching from a fixed rate loan to a variable rate loan. Interest rates for most federal loans have fixed rates, which means that you never have to worry about your interest rate and monthly payment going up if interest rates rise in the future. If you switch to a private variable rate loan, your interest rate could rise above the original fixed rate over time, and your payment could go up. 
  • You will no longer qualify for certain repayment programs or plans. Federal student loans provide options for borrowers who run into trouble, including income-driven repayment (IDR). If you consolidate with a private lender, you will lose your rights under the federal student loan program, including deferment, forbearance, cancellation, and affordable repayment options
  • You will probably lose certain benefits if you refinance. Borrowers working in public service or as teachers in certain low-income schools may be able to get loan forgiveness for certain federal loans. If you refinance your federal loan with a new private student loan, you will no longer be eligible to participate in these federal loan forgiveness programs. You may also lose the protection of loan discharge or forgiveness in the case of death or permanent disability, which you get with federal student loans.  Not all private loans offer loan discharge benefits or forgiveness in the case of death or permanent disability.
  •  Active-duty servicemembers might also lose benefits on pre-service obligations if they refinance. If you are a servicemember on active duty, you are eligible for an interest rate reduction under the Servicemembers Civil Relief Act (SCRA) for all federal and private student loans taken out prior to the start of your service. If you consolidate your loans while serving in the military, you will lose the ability to qualify for this benefit.

If you have a secure job, emergency savings, strong credit, are unlikely to benefit from forgiveness options, then refinancing federal student loans into a private student loan may be a choice worth considering. 

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