Student loan refinancing doesn't need to be complicated.
We’ll walk you through some of the key considerations as you decide whether refinancing or consolidating is right for you (there are even situations where you might want to refinance certain loans and/or consolidate others).
What are your options to refinance or consolidate your student loans?
You have two options: either federal direct consolidation or private student loan refinance. They both combine your loans into one loan, however, there are some key differences.
The federal program: Direct Consolidation Loan
This option is offered by the federal government and only applies to federal student loans. With a Direct Consolidation Loan, you may extend your repayment term, which will lower your monthly payments, but not your interest rate*. You will retain most benefits offered by the federal student loan program (depending on your federal loan type), but you cannot include any private student loans with this option. Some borrowers have utilized this program to take advantage of certain federal student loan benefits, like Public Service Loan Forgiveness.
*The interest rate of a Direct Consolidation Loan is based on the weighted averaged of the underlying loans you want to consolidate, rounded up to the nearest 1/8 of a percent. The weighted interest rate will be fixed for the life of the loan.
Private student loan refinance options
This can involve paying off one or multiple loans. This option allows you to include some or all of your private and/or federal student loans. Student loan refinance is a great option if you are looking to potentially lower your monthly payment, annual percentage rate, or remove a cosigner (like your parent) from an existing loan.
To qualify, you must have a strong credit profile and employment history, and proof of income.
If you qualify, refinancing offers you a variety of options. You have the opportunity to compare lenders to find the best loan refinance option for you. Lenders will offer a variety of terms, like variable or fixed interest rates, no application fees, and choice of repayment terms, which will give you an opportunity to choose the refinancing loan that makes sense for you.
NOTE: The federal government does not have a student loan refinancing program. If you refinance your Direct Student Loans or Direct PLUS Loans with a private loan, you will lose the deferment, forbearance, forgiveness, cancellation benefits, and income-driven repayment benefits offered through the Direct Loan Program.
Should I refinance my private student loans?
Private student loan refinance allows you to choose the loan that best suits your needs. You have a lot of flexibility when you make this decision. You can choose which loans you want to include in a refinance—it can be one, some or all.
For example, you can refinance your private student loans, and separately consolidate your federal student loans with a Direct Consolidation Loan to retain or get the benefits of the federal program.
There are advantages to refinancing
Depending on your primary goal in restructuring your debt, you may potentially achieve:
- A lower annual percentage rate
Sometimes, you will find that a private loan refinance offers you a lower interest rate than Direct Consolidation Loan. You can refinance existing private student loans or refinance federal student loans (or both). Be aware that when you move a federal student loan to a private student loan, you lose the benefits that are part of the federal student loan program.
In addition, student loan refinance may allow you to choose either a fixed or variable interest rate—additional flexibility in the way you choose to repay your student loans.
- Transfer Parent PLUS loans to your child
If you borrowed parent student loans (like a Federal Direct Parent PLUS Loan, or other private parent student loan) for your child and you would now like them to take over the responsibility of repayment, some refinance lenders (like, PenFed Credit Union, CommonBond and Sofi will allow you to transfer the debt to your child. This will require your child to apply for the refinance loan.
- Removal of a cosigner
It is common for a student to need a cosigner for a private student loan when they are attending school. However after graduation, a financially independent borrower may decide it is beneficial for them (or their cosigner) to restructure their debt to remove the need for a cosigner.
- Smaller monthly payments or an extended repayment term
If a smaller monthly payment is your goal, keep in mind that the typical trade-off is an extension of your repayment term. If adding a few years to the term of your loan helps you make your payments on time and stay out of default, this might be the option for you.
- Reduction in the number of loans and loan servicers you're paying every month
If you took out multiple loans from different lenders in order to pay for school, the various lenders and differing due dates can be beyond burdensome. If you’re looking to simplify your life, consolidation can reduce the number of creditors you are paying each month or quarter.
We've got your back
Our website is packed with resources to help you make informed decisions about your student loans. Check out our Student Loan Refinancing and Consolidation Calculator to estimate new monthly payments, compare lenders on our Lenders page, educate yourself with our Resources and explore our Must Reads for things you need to know right now.