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Consolidation | Refinancing | |
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Best for when … | You want to apply for forgiveness, switch servicers without losing federal benefits or access to more repayment plans. | You want a better rate or a different servicer. |
How it works | Take out a federal Direct Consolidation Loan to pay off your current federal loans with a weighted average of your current rates, more repayment plans and the option to switch servicers. | Take out a new loan from a private company with a new interest rate, term, repayment plan and servicer. |
Benefits |
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Drawbacks |
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Student loan consolidation works by taking out a federal Direct Consolidation Loan to pay off your current federal loans — including Parent PLUS Loans. Your new loan comes with an interest rate that’s the weighted average of your current interest rates, though you have the option to pick a new federal repayment plan and servicer. You don’t need to have good credit or a cosigner to apply for consolidation.
Consolidating your loans can be a great way to expand your federal benefits — you’ll qualify for more repayment plans and your FFEL and PLUS Loans become eligible for PSLF.
You might want to consider consolidation if one or more of the following statements applies to you:
You might want to avoid consolidating in the following situations:
Student loan refinancing works by taking out a new loan with a private company to pay off your current student loan balance — both federal and private. The rates and terms of your new loan depend on your credit, income and other aspects of your personal finances. If you can’t qualify on your own, you can apply with a cosigner to get a more competitive deal.
Refinancing can be a great way to save on interest in both the short and long term. Getting a lower rate can make it easier to pay off your loans faster with no change in your monthly cost. Or it can help you lower your monthly cost without paying more in interest if you get a longer term.
You might want to consider refinancing your student loans if any of the following situations ring true for you:
Think twice before refinancing your student loans in the following situations:
Say you have $15,000 in federal student debt: A $10,000 loan with a 4.7% interest rate and a $5,000 loan with a 6% interest rate.
You’re torn between consolidating your debt with a Direct Consolidation Loan with the 10-year Standard Repayment Plan or refinancing. You prequalified for a 15-year term with a 4.5% interest rate with a private student loan refinancing provider.
Here’s how the two options compare:
Consolidation | Refinancing | |
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New interest rate | 5.25% | 4.5% |
Monthly repayment | $160.94 | $114.75 |
Total interest cost | $4,312.51 | $5,654.82 |
In this case, consolidation might be a better deal. While it costs you a little more per month, you can get out of debt faster and save over $1,000 in interest.
But you could also choose to make extra repayments toward a refinanced loan to pay it off in 10 years. In that case, refinancing could be a better deal since it comes with a lower rate.
Student loan refinancing and consolidation serve different purposes. Student loan consolidation is usually a way to expand access to federal benefits, while refinancing is usually a way to save on costs. Which option is right for you depends on your finances and priorities.
You can check out our guides to student loan refinancing and Direct Consolidation Loans to learn more about how each works.
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