You’ve probably heard the statistic that total outstanding student loan debt in the U.S. is over $1.5 trillion. As of late 2019, nearly 70% of students in America graduated with student loan debt, the average balance hovering around $30,000. The figures can be so shocking that they almost don’t seem real—until you have to make your monthly student loan payment, which is an average of $393 per month.
For some, student loan debt can be paralyzing. The hefty monthly payment can weigh down on borrowers, making it difficult to make ends meet. Student loan debt has also been attributed to Millennials delaying major life milestones like getting married, buying a house, or even having kids. It’s a burden that can, at times, feel like it’s too much to bear.
The good news is, thanks to student loan consolidation and refinancing, borrowers don’t have to be stuck with that nearly $400 a month student loan payment. Consolidating student loans or refinancing them might give borrowers the opportunity to get new terms and a new (hopefully lower) interest rate on their student loans.
Depending on the type of student loans you have, you can choose between two consolidation options. The first is for federal loans, which can be consolidated through the federal government. The second is consolidating and refinancing your loans through a private lender. Both options have their merits and drawbacks, so let’s dig into the details.
Consolidation versus Refinancing: How They Differ
For federal loans, consolidation means that your existing federal loans are combined into one new loan with a new rate that’s the weighted average of your old loans’ rates, rounded up to the nearest eighth of a percent.
Those who opt to consolidate their federal loans do so via a Direct Consolidation Loan through the government, which (depending on their original loan type) allows them to keep many of the protections their federal student loans offer, such as deferment, forbearance, or income-driven repayment plans.
But because the new interest rate is the weighted average of the existing interest rates, rounded up, consolidating loans through the government often doesn’t result in cost savings.
Typically, if lower monthly payments are the result of consolidation, it’s because of extending the term of the loan. This may mean paying more in interest over the life of the loan.
When you consolidate federal loans with a Direct Consolidation Loan, they’ll still be considered federal loans. This means a Direct Consolidation loan will still qualify borrowers for federal benefits like Public Service Loan Forgiveness (PSLF) and those mentioned above.
It’s important to note, however, that there are some drawbacks with a Direct Consolidation Loan. For instance, if you have started paying towards PSLF, you’ll have to start your qualifying payments over. And if you have a Perkins Loan, you could lose out on those benefits as well. Additionally, you can only consolidate once.
For those with private student loans, consolidation is the practice of combining your student loans into one single loan with a private lender. This is also often referred to as student loan refinancing, because existing student loans are paid off with a new loan from a private lender. The borrower then repays this new loan, under new terms with a new, potentially (and hopefully) lower interest rate.
Refinancing with a private lender may lead to savings, but it might not be right for every borrower. For those with federal loans, refinancing means losing all federal benefits. So for individuals pursuing student loan forgiveness or benefiting from income-driven repayment plans, refinancing might not be the best option.
Both options could help borrowers streamline their monthly payments, since both options allow borrowers to combine multiple loans into a single loan with one monthly payment. For people who are already juggling a lot of responsibilities, only having one student loan payment can make managing payments easier.
Deciding Whether or Not to Consolidate Student Loan Debt
Student loan consolidation might save you money and shorten your loan term, or may also make your monthly payment more manageable by lengthening your repayment term.
For example, you might have graduated with multiple loans that all come with varying interest rates and loan terms. But if you consolidate, you replace all of your loan bills with just one bill (with, of course, one term and interest rate).
You can even consolidate your private and federal loans together (but only through private student loan refinancing, which unfortunately means you need to give up the benefits of federal loans).
The option is to refinance your student loans which, if you receive a lower rate, could potentially help you cut the cost of interest over the life of the loan. You can refinance private or federal loans, though once again, you lose the benefits of federal loans when you refinance with a private lender.
If you’re considering consolidating your student loans, it’s important to weigh all of your options carefully. Part of this will likely be reviewing different lenders with your federal repayment options and comparing the terms and rates you qualify for.
This can be a time-consuming, and at times confusing process, but may pay off if you’re able to get a reduced interest rate on your student loans.
Before you start browsing interest rates, take a look at your current loans. How much do you owe? What are the average interest rates? Are you enrolled in any federal benefits? Are you eligible for any—or hoping to be?
Having this information at the ready can provide valuable insights as you start gathering information on different lenders. Some lenders, like SoFi, offer a convenient student loan refinancing calculator that can give you an initial idea of how much you could stand to save when you refinance.
A quick internet search about student loan consolidation will result in a number of companies popping up. If you’re trying to figure out what the best student loan consolidation companies are, a comparison of all the rates, terms, loan amounts they accept, and fees can be useful.
Understanding Your Options
While each of these refinancing companies advertise rate ranges and other terms, the loan terms you qualify for will be determined based on a variety of personal factors. To find out what a loan with each company might look like, you may want to get a few different quotes.
Each lender may review different criteria in order to make a lending decision, but most will likely review your credit score and credit history. While a strong credit history can help borrowers qualify for more competitive interest rates, it’s likely not the only factor lenders are considering.
Quotes can be useful tools as you consider refinancing your student loans. Many lenders allow potential borrowers to pre-qualify. This process usually involves a “soft” credit inquiry, which won’t impact your credit score1, to determine the initial interest rates for which you might qualify.
Understanding what rates you actually qualify for can be used to compare and contrast different lenders and terms. In addition to different rates, lenders will have different fees associated with the loan, so it may be helpful to review the fine print closely as you weigh your options.
After you’ve done the math and determined how much you could potentially save in interest by refinancing, consider looking at other benefits offered by the lender. Ideally, you’ll find a lender you feel confident working with as you pay off your loan, since depending on the refinancing terms, you could be working with them from anywhere from five to 20 years.
Some lenders may offer additional benefits. For example, SoFi members can benefit from perks like live customer service 7 days a week and access to exclusive member events.
Members who lose their job through no fault of their own may qualify for unemployment protection, which means they’re able to pause loan payments while they look for other employment. SoFi’s career services team can even help you through your job search.
There are absolutely no hidden fees when you refinance with SoFi and the application process can be completed online. If you’re ready to take the next step in refinancing your student loans, you can get a quote from SoFi in just about two minutes.
Essentially, it’s all about matching the right student debt consolidation company to your specific financial needs.
Take a look at your current interest rates, terms, and loan amounts for your student loans to assess what makes sense for your situation, and remember to consider whether you qualify for federal student loan benefits before consolidating and refinancing with a private lender. Then you can get started on the ultimate goal: paying off student debt sooner.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.
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 SEPTEMBER 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.