Should I consolidate or refinance my student loans?

Consolidation combines loans into one monthly payment with one servicer. Consolidating your loans may make it easier to keep track of your loans if you have more than one student loan with more than one servicer or company.

There are two types of consolidation loans. The type of consolidation loans available to you depends on whether you have federal or private student loans.

Federal Direct Consolidation Loan

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If you have federal student loans, you have the option to combine all or some of your federal student loans into a federal Direct Loan Consolidation

Federal loan consolidation will not lower your interest rate. The fixed interest rate for a Direct Consolidation Loan is the weighted average of the interest rates of the loans being consolidated, rounded up to the nearest one-eighth of a percent. While consolidating your loans may slightly increase your interest rate, it will lock you into a fixed interest rate, so your new payment won’t change over time.

If you have federal loans originated under the Federal Family Educational Loan (FFEL) program or the Perkins loan program, you may be able to consolidate those loans into a new Direct Loan to qualify for Public Service Loan Forgiveness (PSLF).

You can learn more about what type of loan you have through the U.S. Department of Education’s Federal Student Aid

Private consolidation loan

A private consolidation loan or refinancing a student loan allows you to combine all or some of your student loans, private and federal student loans, into one larger private consolidation loan through a private lender or bank.

If you are approved to refinance or consolidate your existing private student loans into a new private loan, the terms of the consolidation loan may allow you to lower your interest rate, lower your monthly payment by extending the length of the repayment term, or release a co-signer from your student loan.

It is possible to consolidate federal and/or private student loans into one private consolidation loan. Consolidating federal student loans into a private consolidation loan has risks.

You should weigh the benefits and risks of refinancing your federal student loan into a private student loan, because changing from a federal to a private student loan eliminates some of these protections and benefits.

  • Look closely if you are switching from a fixed rate loan to a variable rate loan. Interest rates for most federal loans have fixed rates, which means that you never have to worry about your interest rate and monthly payment going up if interest rates rise in the future. If you switch to a private variable rate loan, your interest rate could rise above the original fixed rate, and your payment could go up.
  • You will no longer qualify for certain repayment programs or plans. Federal student loans provide options for borrowers who run into trouble, including income-driven repayment

(IDR). If you consolidate with a private lender, you will lose your rights under the federal student loan program, including deferment, forbearance, cancellation, and affordable repayment options

  • You will probably lose certain benefits if you refinance. Borrowers working in public service or as teachers in certain low-income schools may be able to get loan forgiveness for certain federal loans. If you refinance your federal loan with a new private student loan, you will no longer be eligible to participate in these federal loan forgiveness programs. You may also lose the protection of loan discharge or forgiveness in the case of death or permanent disability, which you get with federal student loans. Not all private loans offer loan discharge benefits or forgiveness in the case of death or permanent disability.
  • Active-duty servicemembers might also lose benefits on pre-service obligations if they refinance. If you are a servicemember on active duty, you are eligible for an interest rate reduction under the Servicemembers Civil Relief Act (SCRA) for all federal and private student loans taken out prior to the start of your service. If you consolidate your loans while serving in the military, you will lose the ability to qualify for this benefit.

If you have a secure job, emergency savings, strong credit, and are unlikely to benefit from forgiveness options, then refinancing federal student loans into a private student loan may be a choice worth considering.

Warning: Just remember that, under current law, once you refinance your federal loans into a private loan, you can’t turn your loans back into federal student loans or get any of the benefits of the federal student loan program.

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