Student Loan Refinancing and Consolidation: Common Questions Answered
What is the difference between consolidation and refinancing?
These are very similar but there are subtle—and important—distinctions. Consolidation generally brings multiple loans together, typically extends your repayment term and lowers your monthly payment. Refinancing accomplishes the same thing but you do not need to include multiple loans in a refinanced loan. In fact, you can refinance a single loan if you choose in order to save money on your interest rate and the total amount you repay. Also, consolidating or refinancing with a private lender is the only way to truly lower your interest rate. The federal (Direct Consolidation Loan) program does not allow you to shop around for today’s lowest market rates.
Can I consolidate private student loans into a Direct Consolidation Loan?
No. The Direct Consolidation Loan program is a federal program for consolidating federal loans only. If you want to consolidate private student loans, you will need to look at refinancing with a private lender.
What is the minimum and maximum amount that can be refinanced?
You’ll need to shop around, but today’s refi marketplace offers minimum loan amounts of $5,000 and maximum loan amounts of $300,000.
Do I still have to pay on my loans while my student loan refi or consolidation is being processed?
You should continue to make scheduled payments on your loans until 1) you receive a final disclosure from your new lender and 2) you receive verification that your existing loans have been paid in full. This verification will come from the current lender or loan servicer you are leaving. If several weeks have passed since you received the disclosure from your new lender but you have not seen payoff confirmation from your former loan holders, you may want to reach out to them to ensure they received the payments.
It is critical that you continue making payments until your consolidation servicer informs you that the underlying loans have been paid off. Your failure to continue to make payments on-time could jeopardize your credit.
What happens if I overpay while my student loan consolidation or refinance loan is being processed? Will I get a refund?
There may be some overlap as your loan transitions to your new lender. If this happens, your previous loan holder will refund any extra money you paid. Note: Keep track of your payments during this time period. If you are due a refund from your former lender, it’s a good idea to know how much so you can follow up, if needed.
How does my spouse's income influence my refinancing?
If your spouse will be listed as a cosigner on the refinanced loan, both of your incomes will be considered for the opportunity to refinance. Also, if you choose to work with a lender that offers combined, spousal refinancing (such as Purefy), both incomes will be considered. But if you’re going it alone, it’s important to note that a lender will evaluate your debt-to-income ratio, which will take into account any joint debts you have. A typical example is a mortgage held in both names. Lenders will review any debts in the applicant’s name (even if the debt is a joint obligation) and compare 100% of that debt against your annual income only. If the debt-to-income ratio is too high, you may be asked to add a cosigner.
Can my spouse and I consolidate or refinance our loans together?
For the Direct Consolidation Loan program, Congress repealed the ability of married students to consolidate their loans together because there was not a viable mechanism to separate the consolidated loan in the event of divorce.
For private refinance loans, very few lenders offer spousal refinancing. Purefy is one such lender you may want to check out. Generally speaking, most private programs allow for spouses to act as a cosigner. This is not the same as merging debt together, but when you cosign, you assume equal responsibility for the refinanced loan—along with your spouse—regardless of whose student loan it was.
Refinancing a PLUS loan—Is there a federal version of this program?
There is no federal option to refinance PLUS loans. Under the Direct Consolidation Loan program, you may consolidate any loans held in your name (including Parent PLUS, Grad PLUS and any other types of federal student loans borrowed), but keep in mind, this is not the same as refinancing the loans to qualify for a lower interest rate.
How to know if student loan consolidation or refi is a scam (i.e., is this legit)?
You should be able to verify the legitimacy of any company offering you a consolidation or refinance deal in a number of ways:
1. You never have to pay a fee to refinance or consolidate your loans. If this is part of the ‘trap,’ run in the opposite direction.
2. Look for things like a Better Business Bureau (BBB) listing or rating, customer reviews, a physical business address, a customer service number where you can easily reach someone who is knowledgeable.
3. Look to a site (like ours) that has vetted lawful companies in the industry to help you compare your options. Be leery of websites that are not SSL-encrypted; especially when you are furnishing information online.
4. Always know that the Direct Consolidation Loan program can be accessed through a legitimate government URL (one ending in “.gov”). Never trust a link that is not official, or a phone number that cannot be validated by the U.S. Department of Education website.
If you feel you have encountered or been the victim of a student loan scam, contact the Federal Student Aid office immediately—and help prevent others from becoming victims.
How to figure out which debt to pay off first?
There are different approaches to deciding which debt to pay off first. Some prefer the “snowball strategy,” where you pay off the smallest loan first, for a psychological boost and feeling of accomplishment. Others prefer to pay off the loan with the highest interest rate first, to help decrease how much they pay over time. Choose the strategy that works best for you, and don’t get discouraged when you see it takes time to tackle all of your debt. Stick with it! Either way you will be reducing your overall indebtedness, demonstrate responsible payment, and improve your debt-to-income ratio.
Can I pay off my loans early?
As with all federal and private student loans, there are no prepayment penalties for making extra payments or paying off the balance early. If you’re making extra payments, be sure to note to your lender that you want the overage applied to your loan principal.
When should I consolidate or refinance my student loans?
Consolidating private student loans when interest rates are low (like now) could potentially save thousands of dollars.
Generally, you are eligible to consolidate after you graduate, leave school, or drop below half-time enrollment. Repayment of a Direct Consolidation Loan can begin 60 days after the loan is funded or sooner. Your loan servicer will let you know when the first payment is due. The repayment term ranges from 10 to 30 years, depending on the amount of your consolidation loan, your other education loan debt, and the repayment plan you select.
NOTE: If any federal student loan you want to consolidate is still in the grace period, you can delay entering repayment on your new Direct Consolidation Loan until closer to your grace period end date. You will indicate this when you apply, and the consolidation servicer will wait to process your application until the appropriate time.
Am I eligible to consolidate or refinance my loans if I dropped out?
Yes. Degree completion may be a prerequisite for some private refinance lenders, but not all. There is no degree completion requirement for the Direct Consolidation Loan program.
How does a Direct Consolidated Loan affect your credit score (if at all)? Will refinancing affect my credit?
Moving the balances of your multiple loans into a single consolidation or refinanced loan may impact your credit score slightly. Here’s how: First, you are creating a new account. Yes, you are closing or paying off other accounts in the process, but 10% of your FICO® score is determined by how many new items appear on your credit profile. Second, a hard inquiry will be conducted at the time you apply for a refinance loan, but the impact to your score should be minimal (usually less than 5 points). The good news is the longer-term effect is you will end up with a lower monthly payment which helps ensure consistency with your payment history (and payment history accounts for 35% of FICO® scores). Finally, an important distinction is there is no credit check required for a Direct Consolidation Loan, whereas a credit check is required for a private refinance loan.
Can I consolidate student loans from my parent's name to mine?
Yes. In today’s marketplace, some lenders offering private student loan refinancing allow the student to take on the Parent PLUS Loan debt in their own name.
Can you be denied for a Direct Consolidation Loan?
Here are some of the eligibility requirements for receiving a Direct Consolidation Loan:
- You must consolidate at least one Direct Loan of FFEL Program loan.
- The loans you consolidate must be in repayment or in the grace period.
- Generally, you cannot consolidate an existing consolidation loan again unless you include an additional eligible loan in the consolidation.
- Under certain circumstances, you may reconsolidate an existing FFEL Consolidation Loan without including any additional loans. These circumstances are explained in the Federal Direct Consolidation Loan Application and Promissory Note.
- If you want to consolidate a defaulted loan, you must either make satisfactory repayment arrangements (defined as three consecutive monthly payments) on the loan before you consolidate, or you must agree to repay your new Direct Consolidation Loan under the,
- Income-Based Repayment Plan,
- Pay As You Earn Repayment Plan,
- Revised Pay As You Earn Repayment Plan, or
- Income-Contingent Repayment Plan.
What's more important, retirement contributions or paying off my student loans?
The optimal strategy is to rank debts and investments by the after-tax interest rate, directing extra money at the option with the highest after-tax interest rate. If the debt charges a higher interest rate, paying down debt and avoiding the need for debt will save more money overall. The same rule applies when a college graduate is deciding whether to save for retirement or to prepay his or her student loans.
If repaying student loans and saving for retirement savings offer a similar return on investment, prioritize the financial need with the shorter time horizon. In most cases, the most immediate expense will be repaying student loans, not retirement. Otherwise, balance the two goals, while preferring options that minimize current debt and avoid a future need to borrow. Be sure to pursue a balanced approach to saving for retirement and paying off student loans, especially if your employer offers a match on your retirement plan, since that is free money.
What's the difference between a servicer and a lender?
A lender is a bank or financial institution that lends you money in exchange for payments of principal and interest. Some lenders service their own loans, while others outsource it to a third party company that specializes in servicing loans. A loan servicer is a company that handles the billing and other services on your federal or private student loan. A loan servicer is a company that manages sending out statements and coupon books and collecting payments on a loan, as well as other customer service functions. The loan servicer will work with you on repayment plans and loan consolidation and will assist you with other tasks related to your federal or private student loan. It is important to maintain contact with your loan servicer. If your circumstances change at any time during your repayment period, your loan servicer will be able to help. When a loan is serviced by another company, you may see an unfamiliar name on your payment statements.
What's the difference between a credit score and a credit rating?
For the record, and for those who don't know the difference, a credit rating and a credit score are two different things. A credit score is derived from items reported in your credit file. It uses a complex mathematical algorithm to come up with a score that predicts whether you are more or less likely to default on your next loan. A credit rating is assigned by a person who looks at issues beyond your credit report before deciding how creditworthy you are. These issues include income, job stability, your ability to use dormant credit lines and more. In the world of student loans, lenders will typically focus on your credit score more than a credit rating.
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