Student loans can have a way of making you feel like a hamster in a wheel—spinning like crazy but getting nowhere fast. And while knowing that around 44 million Americans carry student loan debt might offer some comfort in a “misery loves company” kind of way, the magical loan-forgiveness fairy is still—as far as we know—a myth.
In the meantime, though, there’s a bit of good news—you may have more control than you think. We are here to help illuminate some options available to student loan holders, so they can make decisions that fit best with their financial goals.
Have you been considering one of those options—choosing whether to consolidate or refinance student loans?
But what is consolidation, what is refinancing, and how do you know which one (if either) may be right for you?
This could be a somewhat complicated question, especially since these terms are sometimes used interchangeably. For example, consolidation simply means combining multiple student loans into one loan, but you have different options and can end up with different results by consolidating with the federal government vs. consolidating with a private lender.
Student loan refinancing is when you receive a loan with new terms and use that loan to pay off one or more existing student loans.
Consolidate vs. Refinance. Let’s break it down.
Here’s a simple overview of the different types of student loan consolidation, how they differ from student loan refinancing, and some tips for evaluating whether one of these options might work for you.
Federal Student Loan Consolidation
Federal student loan consolidation is offered by the government and is available for most types of federal student loans—no private loans allowed. When you consolidate with the government, your existing federal loans are combined into one new loan with a new rate, which is a weighted average of your old loans’ rates (rounded up to the nearest eighth of a percent).
This option may not save you any money, but there are still a few potential benefits:
1. Fewer bills and payments to keep track of each month.
2. The ability to switch out older, variable rate federal loans for one, new, fixed rate loan, which could protect you from having to pay higher rates in the future if interest rates go up. (Note: the last variable rate federal student loans were disbursed in 2006. Since then, all federal student loans have been fixed-rate.)
3. Lower monthly payments. But beware—this is usually the result of lengthening your repayment term, which means you might pay more interest over the life of the loan.
Private Loan Consolidation
Like federal consolidation, a private consolidation loan allows you to combine multiple loans into one, and offers some of the same potential benefits listed above. However, the interest rate on your new, consolidated loan is not a weighted average of your old loans’ rates.
Instead, a private lender will look at your track record of managing credit and other personal financial information when deciding whether to give you a new (ideally lower) interest rate on your new consolidation loan.
Bottom line: when you consolidate student loans with a private lender, you are also in fact refinancing those loans. When federal student loans are consolidated or paid off using a private loan, however, it’s important to know you will lose access to certain benefits such as income-driven repayment plans, forbearance and deferment options, and Public Service Loan Forgiveness (among others).
Student Loan Refinancing
As noted above, student loan refinancing is when a new loan from a private lender is used to pay off one or more existing student loans. If your financial situation has improved since you first signed on the dotted line for your original student loans(s), you may be able to refinance student loans at a lower interest rate and/or a different loan term, which could potentially allow you to do one or more of the following:
1. Lower your monthly payments.
2. Shorten your loan term to pay off debt sooner.
3. Reduce the money you spend in interest over the life of the loan.
4. Choose a variable interest rate loan, which can be a cost-saving option for those who plan to pay off their loan relatively quickly.
5. Enjoy the benefits of consolidation, including one simplified monthly bill.
Unlike federal loan consolidation, student loan refinancing is only available from private lenders. However, SoFi will refinance both private and federal student loans, so well-qualified borrowers can consolidate all of their loans into one with loans and/or terms that work better for them.
Things to Consider
While there are advantages to both consolidation and refinancing, sometimes the answer—depending on timing, your budget, or other outside factors—could be to leave well enough alone. As you research your options, consider asking yourself these questions:
What kind of student loans do you have?
Refinancing federal student loans through a private lender might result in a lower interest rate, but you will also lose access to the benefits that come with federal loans, such as Public Service Loan Forgiveness (PSLF), flexible repayment plans, the ability to pause payments, and an interest rate that’s determined by Congress—not your credit score.
If your loans are private, they were issued based on creditworthiness to begin with, so a refinanced loan will follow similar qualifications, and each private lender will have its own underwriting criteria.
What is the loan payoff amount?
While the amount of a monthly payment is important, especially if a refinance could reduce it, it’s wise to read through all the terms of the loan to understand the big picture.
Are the monthly payments lower because the loan is now on a 20-year term instead of a 10-year term? Are there loan origination fees rolled into the payment? Knowing the full, total repayment amount can help ensure that short-term gains don’t bite you in the long run.
What’s the goal?
Consider your reasons for a refinance or consolidation—lowering monthly payments, keeping better track of due dates, or paying off debt as quickly as possible will likely lead to different strategies.
Your monthly budget and what you can (and can’t) afford to put toward your loan repayment will also play a factor here. One way to help ensure the right decision for you is to play with your budget a bit to see which loan options might benefit you most.
What factors do lenders review?
This isn’t typically an issue when it comes to consolidating loans through the federal government. But people interested in refinancing student loans with a private lender will likely need to meet various lender requirements, much like they would for a mortgage or personal loan.
Lenders generally review information like the borrower’s credit history, income, debt-to-income ratio, and other factors to determine what type of interest rate and loan terms they may qualify for.
You may not be able to change the fact that you have student loans, but you can make smart decisions about them. And that’s what ultimately gives you power over your debt. For more information about student loans, you can explore SoFi’s student loan help center to find guidance and gain knowledge to help point you in the right direction.
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SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF DECEMBER DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE
FOR MORE INFORMATION. Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.