Do you feel weighed down by student loan debt? If so, you might consider consolidating or refinancing your loans to lower your monthly payments. In many cases, that can be a smart financial move. But before you make the decision to consolidate or refinance, it pays to take a close look at the pros and cons.
- Consolidating, or refinancing, high-interest private student loans into a single loan with another private lender can lower your monthly payments.
- If you have federal student loans, a better option may be to consolidate them through the government's Direct Loan Program.
- Interest on student loans from federal agencies has been indefinitely suspended during the coronavirus crisis by President Trump, as of March 13, 2020, which should help reduce the total amount you owe. This does not affect private student loans.
- If you consolidate federal loans into a private loan, you will lose some of the special benefits that federal loans have to offer.
How Does Student Loan Consolidation Work?
There are two basic ways to consolidate your student loans—through a private lender or through the federal government. Only federal loans are eligible for federal consolidation.
In the case of a private student loan consolidation (often referred to a refinancing), a private lender, such as a bank, pays off your private or federal student loans and issues you a new loan at a new rate and with a new repayment schedule. Refinancing makes the most sense if you have high-interest private loans and can obtain a significantly lower rate or better terms with the new loan.
With federal student loans, however, you have another—and often better—option. That is to combine them into a new direct consolidation loan, through the Federal Direct Loan Program. Your new interest rate will be the weighted average of your previous loans, and you will remain eligible for some of the special features of federal loans, as we'll explain later.
Note that interest on student loans from federal agencies has been indefinitely suspended during the coronavirus crisis by President Trump, as of March 13, 2020, which should help reduce the total amount you owe. This does not affect private student loans.
While you can't consolidate private loans into a federal loan, if you have both private and federal loans, you can consolidate the private ones with a private lender and consolidate the federal ones through the government program.
Here's a look at the major pros and cons for both private and federal loan consolidations.
Pros and Cons of Student Loan Consolidation
Lower monthly payments
You can release a cosigner from the loan
You'll have fewer monthly payments to make
Repayment terms can be flexible
You could pay more in the long run
You could lose a federal loan's advantages
Any existing grace periods may go away
Pro: Lower Monthly Payments
A private loan consolidation can help reduce your monthly loan payments in two ways. First, the refinanced loan may carry a better interest rate, which not only means lower payments but can also save you money over the life of the loan. Many graduates also find that they can get better interest rates because their credit scores have improved since they first applied for a loan.
Another way that a private consolidation or refinancing can cut your monthly payments is by extending the length of your loan. For example, if you refinance a 10-year student loan into a 20-year loan, you will see a dramatic cut in your monthly payments. But signing up for a longer loan also comes with a big caveat, as we explain in the following Con.
In the case of a federal loan consolidation, you may be able to reduce your monthly payments if you qualify for one of the government's income-based repayment plans. These plans set your monthly payments according to how much you earn or how much you can afford to pay.
Con: You Could Pay More in the Long Run
While a longer-term loan can mean lower monthly payments, you could end up paying tens of thousands of dollars more over the life of the loan because of the accruing interest.
Pro: You Can Release a Cosigner From the Loan
Another benefit of refinancing your private loans is that you might be eligible to sign for the loan on your own. Dropping a cosigner, who is typically a parent or another close family member, not only gets them off the hook for your debt, buy it may raise their credit score and allow them to access new lines of credit if they need to. Federal loans don't typically involve cosigners.
Con: You Could Lose a Federal Loan's Advantages
If you consolidate a federal student loan with a private lender, you'll lose the option to sign up for an income-based repayment plan. You'll also no longer be eligible for the federal loan forgiveness and cancellation programs. These are major reasons to consolidate your federal loans only through the federal program.
If your student loan is still within its grace period, wait until that ends before you refinance it.
Pro: You'll Have Fewer Monthly Payments to Make
Keeping track of multiple student loan payments, on top of all your other bills, can be a hassle. Consolidating will reduce your student loan bills to just one (or two, if you consolidate your private and federal loans separately, as is advisable). Many private lenders even offer a slightly lower interest rate if you enroll in an automatic payment plan. This option saves you a small amount of money each month, and it helps you to avoid ever forgetting a payment.
Con: Any Existing Grace Periods May Go Away
As soon as you take out a refinanced loan with a private lender, you must start repaying it. With many student loans, you can delay payments while you are still in school or if you have entered a graduate program. If your current loan is still within its grace period, wait until that period ends before starting the refinancing process.
Pro: Repayment Terms Can Be Flexible
When you consolidate your loans with a private lender, you can choose how long you want the loan to last and whether it carries a fixed or variable rate. Choosing a variable rate can be riskier since rates can go up anytime, but it can also get you a lower interest rate to begin with. Federal consolidation loans carry a fixed interest rate.
How to Consolidate Student Loans
You can consolidate your student loans through many financial institutions, including your local bank or credit union, as well as lenders that specialize in these types of loans. Among the well-known names in the field are Earnest, LendKey, and SoFi.
You can find more information about the steps for consolidating your federal loans on the Federal Student Aid website.