How to Restructure Your Student Loan

Student loans can amount to a big monthly cost, and depending on your situation, you may have several federal and private student loans to manage each month. If so, restructuring your student loans could result in lower or easier-to-manage monthly payments. 

Borrowers seeking to restructure their loans have several options, including consolidation, refinancing, income-based repayment, and more. In this article, we’ll discuss student loan restructuring options, how they work, and who they’re right for.

Options for restructuring student loans

Student loan borrowers choose to restructure their loans for several different reasons. Some may seek a lower interest rate or reduced monthly payments, while others may want to combine several payments into one or opt for a new repayment term. 

Ask the expert

Erin Kinkade

CFP®

Reasons to consider restructuring include if you have a change in cashflow, such as an increase or decrease in income, if you have a high fixed rate loan and interest rates are low, if you experience chronic poor customer service from their current loan servicer, or you wish to consolidate for simplicity.

Your reason for restructuring your student loans may not be the same as someone else’s, and different options can help you accomplish different goals.

Restructuring method	Best for
Consolidation	Federal student loan borrowers interested in simplifying payments
Refinancing	Private student loan borrowers interested in simplifying or lowering payments
Income-based repayment	Federal student loan borrowers interested in payments that better align with their family income
Deferment or forbearance	Federal student loan borrowers who’ve encountered a temporary financial hardship or decided to further their education
Student loan forgiveness	Federal student loan borrowers who qualify for Public Student Loan Forgiveness (PSLF) and meet other necessary requirements

Consolidation

Who’s eligible?

Borrowers with qualifying federal student loans are eligible for consolidation with a Direct Consolidation Loan through the U.S. Department of Education. Qualifying loans include:

• Direct Subsidized Loans
• Direct Unsubsidized Loans
• Stafford Loans from the Federal Family Education Loan (FFEL) Program
• Direct Plus Loans
• Federal Perkins Loans

Pros

• One monthly payment

  Consolidation will result in a single monthly payment, which is less complicated than several monthly payments

• Income-driven repayment (IDR) eligibility

  Consolidating may make IDR plans more accessible, resulting in lower monthly payments. 

• Fixed rate

  If you have any loans with a variable rate, restructuring them with consolidation will result in a fixed rate, meaning your payments and overall loan cost won’t vary.

• Access to loan forgiveness

  Consolidation could give you access to PSLF if your original loans didn’t qualify. 

Cons

• Loss of certain benefits

  Certain loans, like Perkins loans, come with benefits like cancelation after a set time period. Consolidating may result in a loss of loan-specific benefits.

• Longer term

  You could also end up with a longer term, depending on your total debt. 

• More interest

  Besides paying interest for a longer term, your principal balance will also be consolidated. This consolidated principal balance could result in more interest accruing monthly, as your original non-consolidated balances were smaller. 

How to do it

You can apply for federal loan consolidation through the Federal Student Aid office’s website. The application process takes around 30 minutes, and you should have your loan information, financial information, and federal student aid ID to apply.

Refinancing

Who’s eligible?

Private student loan borrowers often opt to refinance their loans to access a longer repayment term or lower interest rate. While federal student loan borrowers can also refinance with a private lender, doing so will result in losing certain federal loan benefits. 

If you’re thinking of refinancing federal loans, ensure you weigh the pros and cons before doing so. 

Pros

• One monthly payment

  Refinancing could result in a single monthly payment, depending on whether you choose to refinance all your loans into one.

• Fixed rate

  Borrowers with variable-rate loans could get a fixed rate, meaning more predictable monthly payments. 

• Lower monthly payments

  Opting for a longer-term loan could result in more affordable monthly payments.

Cons

• Loss of benefits

  It’s possible you’ll lose certain benefits if you choose to refinance your federal student loans. 

• Longer term

  A longer loan term means you’ll be paying off your student loans for a longer time frame.

• More interest

  If you choose a longer repayment term, it could result in higher cumulative interest costs over the life of your loan. 

How to do it

Many private lenders offer student loan refinancing. Before you choose a lender, be sure to compare rates, fees, terms, and lender reputations. Doing your due diligence will help you find the best possible option for your situation.  

Income-based repayment

Who’s eligible?

Qualifying federal student loan borrowers are eligible for income-based repayment through the U.S. Department of Education. There are currently four federal income-driven repayment (IDR) plans available, and each takes your income and family size into account when determining your monthly payments:

• Saving on a valuable education (SAVE)—formerly REPAYE
• Pay as you earn (PAYE)
• Income-based repayment (IBR)
• Income-contingent repayment (ICR)

Pros

• Lower monthly payments

  Converting to an IDR plan will result in lower monthly student loan payments, freeing up cash for other essential expenses or savings goals. 

• Multiple options available

  It’s possible your loans will be eligible for multiple repayment plan options, allowing you to choose the one that’s best for your situation. 

Cons

• Longer repayment term

  Restructuring your federal loans with an IDR may result in a longer loan term, so you’ll be paying off your loans longer.

• More interest

  That longer term could result in higher cumulative interest costs.

How to do it

Borrowers with eligible federal student loans can apply for an IDR plan through the Federal Student Aid office website. The application process generally takes about ten minutes, and you’ll need your federal student aid ID, loan information, and financial information to apply. 

Deferment or forbearance

Who’s eligible?

Federal student loan borrowers facing temporary financial hardships or furthering their education may qualify for deferment or forbearance. Both allow you to pause or reduce your student loan payments temporarily if you’re struggling to make payments.

Note that interest on your loans generally accrues during forbearance, and it may or may not accrue during deferment. 

Pros

• Temporary relief

  Federal student loan borrowers opting for deferment or forbearance get temporary relief, receiving lower or no student loan payments for a set period.

• Don’t need to pay interest in some cases

  With deferment, you may not be responsible for accrued interest on certain loans, such as Direct Subsidized Loans.

Cons

• Loss of progress

  Temporarily stopping your loan payments means you’ll lose progress toward certain student loan forgiveness programs, like PSLF. 

• Will need to pay interest in many cases

  Borrowers typically pay accrued interest when their loans are in forbearance, and some borrowers in deferment also pay interest.

• Financial hardship

  You generally need to prove that you’re enduring a significant financial hardship to qualify for forbearance or deferment. 

How to do it

Provided you meet the eligibility requirements for forbearance or deferment, you can apply for both on the Federal Student Aid website. You must complete a specific application that aligns with your reason for requesting a forbearance or deferment. 

For instance, the application for an economic hardship deferment differs from the one for a graduate fellowship deferment. 

Student loan forgiveness

Who’s eligible?

Federal student loan borrowers who’ve pursued certain career paths may be eligible for loan forgiveness. The most common loan forgiveness program is PSLF, which provides teachers, government employees, and nonprofit workers with access to loan forgiveness. That said, other less common loan forgiveness programs also exist. 

Pros

• Payment relief

  Having your student loans forgiven can provide some much-needed financial relief. 

• No tax consequences

  With PSLF, you won’t need to worry about your forgiven loan balance counting as income according to the IRS. This means no unexpected tax consequences. 

Cons

• Takes a while to qualify

  You must make 120 qualifying payments, or ten years’ worth, to be eligible for PSLF.

• Limited job mobility

  If you want to move from the public to the private sector, you may not be able to do so if your goal is to have your student loans forgiven under PSLF. This lack of mobility could stunt your earning potential. 

How to do it

Federal student loan borrowers can learn more about forgiveness and cancellation programs on the Federal Student Aid website. Different programs have different application processes and eligibility criteria, so it’s important to do your research to determine the steps you need to take.  

What’s the best student loan restructuring method for you?

The best student loan restructuring method for you depends on whether you have private or federal loans. 

If you have private student loans, your options are more limited

Private student loans aren’t eligible for federal consolidation, IDR plans, deferment or forbearance, or loan forgiveness, so your only choice is refinancing with a private lender. 

You’ll generally need good credit to qualify for a refinance, and applying for a refinance will result in a hard credit pull, which can damage your credit score slightly.   

Federal student loan borrowers have more restructuring options

Consider your financial situation and short- and long-term goals to determine which option best meets your needs. Applying for federal loan consolidation, IDR plans, deferment or forbearance, or loan forgiveness generally won’t impact your credit score. 

Ask the expert

Erin Kinkade

CFP®

Restructuring your student loans can affect other financial goals and plans. If a longer term is desired, the loan could end up costing more in interest and impact productive savings, such as an emergency fund, or contributing to a retirement plan or IRA/Roth IRA. However, it could be that extending the term could lower monthly payments and possibly allow more funds to be directed to those savings accounts. Consolidating into a shorter term loan, could impact savings as well. Although, presumably, you would shorten the term because your financial condition has improved.

FAQ

What is the difference between consolidating and refinancing?

The difference between consolidating and refinancing often relates to borrower intent, and to some degree, loan type. Borrowers who consolidate their loans often want to combine multiple payments into one monthly payment, while those who refinance may want to reduce their monthly payments by extending their loan term. 

Likewise, federal student loan borrowers frequently opt to consolidate with a federal Direct Consolidation Loan to retain certain federal loan benefits. Refinancing with a private lender means sacrificing some federal benefits. 

Will restructuring affect my credit score?

Whether restructuring will affect your credit score depends on the method you choose. Federal student loan borrowers who opt to restructure through a federal program won’t see an impact on their credit. 

But those who opt to refinance with a private lender could see their credit score drop slightly. This drop occurs when a lender does a hard credit pull to determine if you qualify for a loan, and it’s generally small and temporary.

If I choose one restructuring method now, can I restructure again later?

Depending on the type of restructuring method you choose, it’s possible to choose a different method in the future. The notable exception is when you refinance your federal loans with a private lender. You cannot convert them back to federal loans to regain lost benefits, like access to IDR plans or PSLF. 

Are there fees associated with restructuring?

No fees are associated with federal loan consolidation, IDR plans, deferment or forbearance, or loan forgiveness. A loan origination fee may apply when you refinance with a private lender.  

How quickly can I get approved for a restructuring option?

The time it takes to get approved for student loan restructuring depends on your chosen option. For example, it generally takes around 30 days to process an IDR plan application and up to six weeks to get approved for a Direct Consolidation Loan. 

Do all student loan servicers offer restructuring options?

Federal student loan servicers generally offer the same set of restructuring options. If you have specific questions about restructuring your loan, consider contacting your loan servicer directly.