How to Consolidate or Refinance Your Student Loans

Loans, Student Loans
Consolidate Student Loans

There are two types of student loan consolidation: federal and private. These processes are often confused — but they’re very different. Here’s how:

  • Federal student loan consolidation is a logistical move. To participate in some federal loan repayment programs, you must consolidate your loans, but the process won’t lower your interest rate.
  • Private student loan consolidation is a financial move. If you qualify, a private lender will offer you a new, potentially lower interest rate. This process is also referred to as student loan refinancing.

Read on to learn how to apply for federal student loan consolidation or student loan refinancing and how to decide whether one is right for you.

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Federal student loan consolidation

Only federal student loans are eligible for this type of consolidation. The government combines your loans into one direct consolidation loan and assigns you a 10- to 30-year repayment term based on your total balance.

How to apply

You can apply for a direct consolidation loan online at studentloans.gov. Log in with your Federal Student Aid ID and click on “Complete a Consolidation Loan Application and Promissory Note.” Make sure you’ve decided on a student loan repayment plan and a student loan servicer; you can choose each on the application.

If you’d like extra guidance before applying, our step-by-step guide will walk you through the process.

The details

Interest rates: The interest rate of your consolidated federal student loans will be a weighted average of your previous rates, rounded up to the next 1/8 of 1%. It won’t be determined by your financial history, as it would be if you refinanced.

Benefits: Consolidating some types of loans, like those from the Federal Family Education Loan Program, makes them eligible for certain benefits. These can include income-driven repayment, which ties your loan payments to your earnings and forgives your federal loan balance after 20 or 25 years, and Public Service Loan Forgiveness. This program dissolves your remaining balance after you make 120 monthly payments while working in a public service job.

Drawbacks:  Because your new interest rate is rounded up, it could be higher than your rate before consolidation. You’ll also lose forgiveness benefits specific to Perkins loans if you consolidate them. Consider keeping those separate when you consolidate if you plan to take advantage of Perkins loan cancellation.

It’s always free to consolidate your loans with the government on studentloans.gov. Steer clear of any company that charges a fee to consolidate them for you. Learn how to spot a student loan scam.

Student loan refinancing

You can refinance private loans, federal loans or both types together. When you do, a lender pays off your existing loans and issues you a new private loan at a new interest rate. You can use a co-signer to qualify or get a lower rate, but that person will be responsible for the loan if you can’t repay it.

How to apply

You can apply to lenders individually or compare multiple offers through NerdWallet’s partner, Credible.

Follow the link below to fill out a brief form on Credible’s website. If you qualify, you’ll receive immediate, personalized offers from multiple lenders without affecting your credit. If you continue with the process, the lender you choose will perform a credit check later on.

You can also compare student loan refinancing options using our guide, which includes reviews of each lender.

The details

Interest rates: Your financial history — including your credit score, income, job history and educational background — will dictate your new interest rate when you refinance. The more attractive your financial profile appears to a lender, the lower the interest rate you’ll receive. You can generally choose between fixed and variable rates when you refinance, but variable rates are riskier because they could go up in the future.

Benefits: Depending on the year you first borrowed, you could be paying as much as 6.8% in interest on undergraduate federal loans and 8.5% on graduate PLUS loans. Private loan interest rates can be even higher. Interest rates offered by lenders through Credible start at 3.5% for a fixed-rate loan. A lower interest rate means a lower payment and more money in your pocket over time.

Drawbacks: When you refinance federal loans, you won’t be able to repay them on an income-driven plan or receive forgiveness through Public Service Loan Forgiveness or Perkins loan cancellation. And you can’t postpone subsidized student loan payments interest-free, which is known as deferment.

Borrowers with a credit score of 690 or above are most likely to receive competitive offers from lenders. If your credit score is lower, you’re unlikely to be approved, but you have other options. You can improve your credit score and refinance later, or you can use a co-signer.

Brianna McGurran is a staff writer at NerdWallet. Email: bmcgurran@nerdwallet.com. Twitter: @briannamcscribe.

Updated Oct. 25, 2016.