Student loans represent a significant burden on millions of borrowers throughout the United States, with the average loan balance coming in at slightly more than $30,000. Many borrowers have far more to repay over 10, 20, or even 30 years, which can put a strain on month-to-month cash flow.
In an effort to reduce student loan payments, both consolidating and refinancing can be viable options. Combining student loan balances under one roof, either through consolidation or refinancing, has the potential to lower a borrower’s interest rate, extend the repayment term, or both, which can reduce the monthly payment to a more affordable level.
The Difference Between Debt Consolidation and Refinancing
Although student loan consolidation and refinancing have similarities, there are stark differences borrowers should know about. Federal Direct Consolidation Loan is a program that allows you to combine outstanding federal student loan balances, either in full or in part, with the federal government. Only federal student loan balances are eligible for consolidation under this program.
Borrowers can easily complete a consolidation of selected federal loans through a brief online request form through the Department of Education. All the provisions of federal student loans remain available to borrowers, including income-driven repayment plans, deferment, and forbearance, with a loan consolidation.
Refinancing student loan debt is a different process that involves a private student loan lender, not the federal government. When refinancing, student loan borrowers have the option to combine one or more federal or private student loans into a single loan with a new lender – sometimes referred to as private student loan consolidation.
Refinancing is available through many private lenders, meaning interest rates, repayment terms, features, and total costs differ greatly. Refinancing can be beneficial to student loan borrowers if they are able to secure a lower interest rate than what a consolidation or their original loan terms offered. However, refinancing takes away any provisions that are inherent to federal student loans.
You earned a degree—now you deserve a better interest rate
- Rates start at 2.57% APR
- Refinance both federal and private student loans
- Skip one monthly payment each year if certain conditions are met
- 12-month forbearance period as well as academic and military deferment
How to Refinance Consolidated Student Loans
Some borrowers may opt to consolidate their federal student loans initially, but refinancing may offer more benefits like a lower interest rate or extended repayment terms beyond the consolidation. In this case, refinancing can be done directly with a private lender even after a consolidation is done.
To refinance consolidated student loans, student loan borrowers need to simply find the private lender they would like to utilize, complete an application for the refinance, and once approved, make payments to the new private loan lender. Most student loan lenders offering to refinance loans have an easy online application process, the ability to add a cosigner to strengthen the application, and several options for repayment terms.
How Often Can You Refinance a Student Loan?
Student loan borrowers can refinance their student loans as many times as they would like, so long as their credit and income remain strong. Private student loan lenders do not typically put restrictions on how often loans may be refinanced, although borrowers may need to move to a different lender if a refinance was recently completed.
As interest rates shift, refinancing student loan debt may be a cost-effective strategy for reducing the total cost of borrowing. However, there are factors to consider before refinancing multiple times.
Things to Consider Before Refinancing a Student Loan
Refinancing student loan debt with a private lender requires an application, which allows the lender to review a borrower’s credit history and score. Submitting many applications for refinancing might negatively impact one’s score, as credit reports are pulled with each application submitted.
Additionally, refinancing away from federal student loans means borrowers lose special protections and provisions that only the federal government offers. Private student loan lenders do not typically offer income-based repayment plans, nor do many give the option to defer payments should an economic hardship take place. It is incredibly important for borrowers to consider these features before financing consolidated federal student loans.
While consolidating and refinancing are both methods to cut your monthly student loan payment, borrowers do not have to take an all-or-nothing approach. Keeping some federal loans, ideally those with the lowest interest rates, and consolidating instead of refinancing may be beneficial in maintaining some flexibility for future payments.
Similarly, refinancing only a portion of student loan debt, like those loans with the highest interest rates, is often a smart choice for borrowers who want to reduce the cost of some of their loans. Overall, taking the time to consider the impacts of consolidating, refinancing, or a combination of strategies, is necessary to make the right decision as a borrower.
Author: Jeff Gitlen
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