Do you have three minutes? If you’ve ever considered student loan consolidation or refinancing, it’ll be worth your time. Those terms are often conflated and confused, so we want to set the record straight. Here goes:
1. Consolidation doesn’t always = refinancing
Student loan consolidation is often made to seem synonymous with refinancing, but the two aren’t always identical.
Federal loan consolidation means changing one or more federal student loans into a single new federal Direct Consolidation Loan. Student loan refinancing, which is also sometimes referred to as consolidation, is a way to save money by taking out a new, lower-interest loan to pay off your existing loans.
2. Consolidation won’t necessarily save you money
Refinancing can save you money by lowering your interest rate, but federal loan consolidation can actually cost you more in the long run because it may increase your term length. So why do it?
To access repayment and forgiveness options: Only federal direct loans are eligible for most income-driven repayment plans and Public Service Loan Forgiveness. If you don’t know what kind of loans you have, sign in to your Federal Student Aid account on studentloans.gov to look it up. Consolidating will help you qualify for those programs if you don’t already have a federal loan that qualifies.
To get out of default: Consolidation is one of three ways (along with full repayment and loan rehabilitation) to escape federal loan default. After consolidating, you’ll be able to sign up for an income-driven repayment plan or put your loan in deferment or forbearance, but the default status will remain on your credit report.
3. Consolidating federal loans is free
You may have seen Facebook ads or gotten phone calls about companies offering to consolidate or forgive your debt. They’ll charge you fees to do so, but you can consolidate your federal loans for free by logging in to your Federal Student Aid account and filling out an application.
That’s the CliffsNotes version of student loan consolidation. To dig deeper, read about the pros and cons of consolidation and refinancing.