Student loan consolidation and refinancing serve similar purposes. Both can make tracking and managing student loan payments more manageable, and often times you can benefit from a lower rate or lower monthly payments when you employ these strategies.
Despite their similarities, student loan consolidation and student loan refinancing can offer distinct advantages and disadvantages. Here’s what to know if you consider moving forward with either approach.
What’s the Difference?
The differences between student loan consolidation vs. refinancing come down to what financial strategy you’re looking to use. For instance, borrowers often opt for student loan consolidation to simplify their monthly payments. When consolidating your loans, you bundle multiple loans with one new loan. You can also accomplish this with refinancing, but borrowers typically refinance to access a lower rate or reduce their monthly payments.
Student Loan Consolidation
You can consolidate both federal student loans and private student loans.
A Direct Consolidation Loan through the U.S. Department of Education is worth considering if you have federal loans. You won’t get a lower interest rate with a Direct Consolidation Loan, as your new rate will be a weighted average of your prior rates rounded up to the nearest 1/8th percent. You could opt for a longer repayment term to make your monthly payments more manageable. But, with a longer term, this may mean you pay more in the long term.
Federal and private student loan consolidation is also an option with private lenders. Just keep in mind if you consolidate your federal loans with a private lender, you’ll sacrifice potential federal benefits.
Pros:
- One monthly payment instead of several
- Possible lower payments if you opt for a longer term or a lower rate through a private lender
Cons:
- Longer terms could result in higher interest payments over time
- Loss of potential benefits if you consolidate federal loans with a private lender
Federal Loan Consolidation vs. Private Loan Consolidation
Federal loan consolidation involves consolidating your federal student loans with a federal Direct Consolidation Loan, while private student loan consolidation involves consolidating with a private lender. While you can’t consolidate private student loans with a federal Direct Consolidation Loan, reducing private and federal student loans with a private lender is possible. But if you opt to do so, you’ll lose potential federal student loan benefits.
Student Loan Refinancing
Refinancing can accomplish a similar goal as consolidation—converting multiple student loan payments into one. But the primary benefits of refinancing student loans are a lower interest rate or lower monthly payments. Your new rate will depend on your lender, credit history, income, debt level, and other factors.
The U.S. Department of Education does not offer an option to consolidate federal and private student loans together – only federal loans are eligible to consolidate through the Direct Consolidation program. However, borrowers can refinance both federal and private student loans with a private lender. When deciding if it’s a good idea to refinance federal student loans, be aware you’ll give up possible benefits like loan forgiveness if you refinance with a private lender.
Pros:
- One monthly payment instead of several
- Potentially lower interest rates
- Possible lower monthly payments
Cons:
- Longer terms could result in higher interest costs over the life of the loan
- Sacrifice possible benefits if you consolidate federal loans with a private lender
- Potentially higher rates if refinancing student loans with bad credit
Repaying Consolidated Student Loans vs. Refinanced Loans
You may have more repayment flexibility with a federal Direct Consolidation loan, as you’ll retain access to benefits like forbearance, deferment, and eligibility for income-driven repayment plans. As their name suggests, these repayment plans consider your overall income.
For instance, with a federal income-contingent repayment plan, you’ll pay either 20 percent of your monthly discretionary income or the monthly amount you’d pay on a fixed repayment plan over 12 years (adjusted based on income). Your maximum repayment period will be 25 years. Other IDR plans are also available.
You typically won’t have multiple repayment options when you refinance with a private lender, though some may offer modifications if you’re struggling financially. Instead, you’ll pay your student loan in monthly installments, and your payment amounts depend on your loan principal and interest rate.
When Should You Consolidate Student Loans?
Consolidation may be a better option than refinancing in these instances:
- You want to consolidate your federal student loans
- Your primary goal is to simplify your payments rather than to access a lower rate
- You want to retain federal benefits like forbearance, deferment, and IDR plans
When Should You Refinance Student Loans?
Refinancing could be a better choice if:
- You have private student loans
- You have federal student loans and are comfortable with losing possible federal loan benefits
- Your primary goal is to get a lower interest rate
Refinance Your Student Loans with ELFI
If you’d like to move forward with student loan refinancing, ELFI offers flexible loan terms and low rates*. Our student loan refinance eligibility requirements are as follows:
- U.S. citizen or permanent resident alien.
- Age of majority or older at the time of loan application.
- Minimum loan amount of $10,000.
- Bachelor’s degree or higher.
- Minimum income of $35,000.
- Minimum credit score of 680.
- Minimum credit history of 36 months.
- Bachelor’s degree from a Title IV U.S. domiciled non-profit college or university.
If we sound like a good fit, learn more about student loan refinancing with ELFI today!
