Student Loan Refinance & Consolidation Cheat Sheet
Want to know more about student loan refinance and consolidation? You've come to the right place! In this cheat sheet we go over everything you need to know about the two including what they are, how they may benefit you, and which of your loans are eligible.
I. What is Student Loan Refinancing?
Just like you can refinance your car or home, you can refinance student loans with a private lender. Student loan refinancing is the process of trading in your old student loan for a new one with a new interest rate and/or a new repayment term. Often when refinancing student loans, borrowers are able to get a lower interest rate—potentially saving them thousands of dollars.
When refinancing your student loans, you have the option of choosing between fixed and variable rates. Fixed rates stay the same throughout the life of the loan and are typically higher than variable rates. Variable rates are lower because they change with the market and are seen as less risky to the lender.
Below we go over the top reasons why refinancing may make sense for you, as well as the situations when you want to avoid it.
Reasons to Refinance with a Private Lender:
- You want to obtain a lower interest rate therefore saving you money
- You want to increase or decrease your monthly payment
- You want a new student loan servicer
- You want to remove a cosigner from your student loans
Reasons to Avoid Refinancing with a Private Lender:
- You don’t want to lose your eligibility for federal student loan protections like Public Service Loan Forgiveness, Income-driven repayment plans, and deferment benefits
- You don’t have a good credit score (at least 700)
II. What is Student Loan Consolidation?
Student Loan Consolidation is just what it sounds like—combining multiple loans into one. The most popular way to consolidate student loans is through the Department of Education’s Direct Consolidation Loan. This takes all of your federal loans and gives you one single loan with a new interest rate. The government uses a weighted average of your previous loans to determine the new interest rate. This new rate, therefore, won’t necessarily save you money.
The following are the top reasons to consider consolidation as well as the top reasons to avoid it.
Reasons to Consolidate Through the Government:
- You want to make your federal student loans more manageable and easy to pay back
- You are interested in federal programs such as Public Service Loan Forgiveness and Income-driven repayment plans
Reasons to Avoid Consolidation with the Government:
- You have private student loans that aren’t eligible for Direct Loan Consolidation
- You are interested only interested in saving money on your student loans
- You want to pay off your loans with high interest rates first
III. Which Should I Choose?
There is no clear-cut answer when it comes to choosing refinancing vs. consolidation—it all depends on the individual’s situation. Before you make a decision, it is crucial to consider all of the implications of each.
If you are mainly interested in saving money, refinancing is most likely your best decision. Because you are typically given a new, lower interest rate—you will end up paying less over the life of your loan. In addition, when refinancing your student loans, you are usually able to consolidate your loans into one.
The most important reason to avoid refinancing with a private lender is that you lose all of your federal student loan benefits, as mentioned above. While many of these are helpful for certain people, you may never end up using them even if you don’t refinance. If you don’t plan on working in a job that qualifies for Public Service Loan Forgiveness or have no plans of switching to an income-driven repayment plan, you don’t have much to worry about.
If you think you will want to utilize some of the federal student loan benefits or do not qualify for refinancing, then consolidation through the government may be your best choice. Consolidation leaves these benefits on the table while also making your loans more manageable. Lastly, keep in mind that you don’t have to consolidate all of your loans. For example, say you have four loans. You can choose to consolidate two, three, or four depending on your situation.
IV. What Student Loans Can I Refinance?
If you have decided that you want to refinance your student loans, you are probably now wondering which are actually eligible. Though you may find that you can refinance all of your loans, it is important to consider each individually to see if it is worth it. The two different categories of loans that are eligible, and whether it is typically smart to refinance them or not, are as follows:
1. Federal Student Loans
All federal loans are eligible for refinancing. Whether you should or not, however, depends on your current loans and refinancing offers. Many federal student loans have a substantial interest rate and are, therefore, a good candidate for refinancing. Parent and Grad PLUS Loans issued after July 1, 2015 have an interest rate of 6.84%! Furthermore, though the interest rates on Direct Unsubsidized Loans have recently dropped, those issued before June of 2013 have rates of 6.8%.
If you have any of the above-mentioned federal loans, or have a different one with a high interest rate, you may be able to save thousands through refinancing. Private refinancing rates start as low as 1.90% and average around 3.50%, both of which may be substantially lower than your current rate.
You may want to avoid refinancing your student loans if you are interested in the federal student loan benefits mentioned above or if you aren’t eligible for refinancing due to poor credit.
2. Private Student Loans
In most cases, it is always smart to look into refinancing private student loans. These loans, when first issued, have higher interest rates than federal loans in the vast majority of cases. When you have established some credit and/or have landed a secure job, you are much more likely to receive better offers when it comes to your loan's interest rate.
In addition to lower interest rates, refinancing your student loans can help you change the terms of your loan to make them better suited to your financial situation. Depending on the new lender, you may be able to change your length of repayment, your monthly payment, or the type of the interest rate you have (variable or fixed).
If you have a private student loan and are offered a lower interest rate through refinancing, there aren’t many reasons why you shouldn’t accept it. Even if you are unsure if refinancing is right for you, it never hurts to see what offers you may receive.
V. How Do I Find Someone to Refinance My Student Loans?
There are multiple ways to find a lender to refinance your student loans with. You could do a simple Google search and apply to multiple lenders individually too see what kind of offers you get back. This seems like it might be pretty time-consuming and unnecessary, however, right? Well, you are right and there is a better way. This way is called LendEDU!
Here at LendEDU you can compare offers from up to 12 lenders with just one application! Best of all, this application doesn’t hurt your credit score like submitting your application through individual lenders or through other student loan refinance comparison sites.
The LendEDU application and each lender take into account the following information in deciding if you are eligible for refinancing:
1. Your Credit Score
Arguably the most important factor in obtaining private student loan refinancing is your credit score and, if applicable, your cosigner’s credit score. Lenders decide your interest rate based on your credit score. The better your credit score, the more trustworthy you are.
Most of our partners here at LendEDU require a minimum FICO credit score of 660. If you do not meet this minimum, you may want to consider working to improve your credit score before trying to refinance.
2. Your Income
If you don’t have such a great credit history, but have recently secured a high-paying job, you may still be eligible for refinancing. Most lenders require at least $24,000 in yearly gross income but the higher your income, the more likely you are to get a better deal. If you have a substantial income, there is a greater chance that you will be able to pay off your student loans and you are therefore seen as more trustworthy.
3. Your Debt-to-Income Ratio
Though this is related to income, the debt-to-income ratio is another important factor that student loan refinance lenders consider. Even if you make a substantial salary, this might not mean much if you owe hundreds of thousands of dollars in debt.
Lenders like to see a maximum debt-to-income ratio of around 40%. This means that your total debt should be less than 2/5 of your total income. If you can meet this, as well as the credit score and income requirements, there is a great chance that you are eligible for refinancing!
VI. Final Thoughts
Repaying debt can be a major issue for those who had to take out student loans to finance their education. Many of these people think that they are locked into their original student loans until they pay them off—but this simply isn’t true!
After reading the above sections, if you still think refinancing your student loans is a viable option for yourself, take a look at our partners below. You can learn about the different lenders, their specific offers, and how their services may benefit you. In addition, you can apply through LendEDU’s homepage to see all of your offers at once!