How to Decide Whether to Refinance or Consolidate Your Student Loans

Refinancing and consolidating student loans are terms you might hear all the time. But understanding the underlying differences between them, and how they really work, isn’t just common sense. Let’s look at how to decide whether to refinance or consolidate your student loans. 

What Does It Mean to Refinance Student Loans?

Refinancing student loans can be a great way to get more desirable terms and rates. The process is straightforward: You take out a new loan in order to pay off your current one. Though this might sound risky, it’s typically beneficial to you. When you refinance your loan, it’s possible to get a lower interest rate, adjust the terms of the loan to make repayment more realistic for you, or even add or remove co-signers. To be sure, there are plenty of reasons why it makes sense to refinance student loans. 

You should note that refinancing student loans only really applies to private loans. It’s not possible to refinance to a federal loan. This doesn’t mean you can’t refinance your federal loans (although, we’ll discuss later why this isn’t always such a good idea), it just means the federal government doesn’t do refinances. They do offer consolidated loans, which are extremely similar to a refinanced loan, but these also come with a caveat we’ll look at in the next section.

Due to this, borrowers considering a student loan refinance need to look exclusively at private lenders. The process of finding the best private lender can be complex—unless you use a service to help find your best offers. Juno is one company that collects offers from a wide range of private lenders looking to gain access to their pool of clients. This allows them to find the absolute optimal student loan refinance deals for consumers, while still providing them as a free service, since Juno just charges a set rate to the lender for matching them with their members. 

Refinancing can also allow you to adjust the term of your loan. If having a longer or shorter repayment period aligns more with your current financial position and goals, this can be accomplished through a student loan refinance. 

Hopefully those wondering “What is refinancing?” now understand how this pertains to student loans. Let’s move on to student loan consolidation.

What Is Consolidating Student Loans?

Whereas refinancing is taking out a new loan to replace a single one of your current student loans, consolidation takes multiple loans and combines them into one new one. This can be advantageous for individuals who want to simplify their loan repayment. Instead of having to worry about several loans, you can instead just pay one each month. 

Student loan consolidation can happen at the federal or private level. It’s important to know, however, that they don’t come with the exact same conditions. First of all, you can only consolidate federal loans with the federal government. If you want to do a federal student loan consolidation but have private loans as well, those will have to be dealt with separately. 

Additionally, consolidating with the federal government won’t change your weighted average interest rate. As with refinancing, lowering your net interest rate is generally one of the main benefits of consolidating any kind of debt. But this isn’t the case with federal student loans. 

On the private side, it’s possible to consolidate private or federal student loans. Furthermore, when you consolidate with a private lender, you can effectively lower the amount you’re paying through getting a better interest rate. It’s important to note, however, that some private loans come with variable interest rates, which can change over time based on market dynamics. Borrowers need to understand the potential risks associated with this before deciding on a rate that seems more appealing at the time, but will actually be worse in the long run. 

With an understanding of what it means to refinance and consolidate student loans, borrowers can determine which option makes more sense for them. 

How to Decide Whether to Refinance or Consolidate Your Student Loans

No two people are going to have the same answer to whether they should refinance or consolidate their student loans. For some people, the answer might be to do neither of these things. 

The first consideration to make is whether you might lose critical repayment benefits inherent to some federal student loans if you refinance. For instance, income-driven repayment, forbearance, and forgiveness plans are all things you might give up if you refinance or consolidate a federal student loan. Some individuals might be okay with this if it allows them to get significantly better rates or terms on their loans. Others, though, will want to do everything in their power to avoid losing those beneficial federal student loan stipulations. 

People who have private student loans, or some federal loans with higher interest rates, such as PLUS loans, will definitely want to think strategically about refinancing or consolidating. With private loans, you don’t have to worry about losing any of those federal perks, so you should feel free to refinance or consolidate in any way that might help you financially. Doing these things doesn’t cost you fees when refinancing student loans, so you really just need to figure out if you’ll be saving money on lower rates or terms that work better for your situation. 

There’s also the issue of credit when it comes to dealing with private lenders. Those who want to refinance will have to show a certain credit score, or else find a co-signer, in order to get a new loan. Most lenders are going to want to see a credit score in at least the mid-600s in order to extend a loan. If you don’t have a great score, some lenders might still work with you, but it won’t be all of them. Borrowers with poor credit who feel like refinancing or consolidating student loans will benefit them can potentially use a co-signer to do so. Just remember that a co-signer is then obligated to repay debts if the primary borrower doesn’t fulfill their obligations. 

At the end of the day, deciding whether to refinance or consolidate your student loans will be determined by if you can get a better deal. Those with certain advantageous federal loans might want to hold off on giving those up. But private loans, and some federal loans depending on the circumstances, are going to be fair game.