When it comes to student loan refinances, the words consolidation and refinance are often used interchangeably. But they are actually not the same thing – each describes an entirely different loan process. Because of the differences, you may find yourself going in one direction or the other. You may even decide that the best action is inaction (it actually is possible!).
Let’s take a close look at why that’s true.
Student Loan Consolidation
Referred to as a direct consolidation loan, a consolidation is a government program in which you can combine various federal student loans into one loan with a single monthly payment.
The interest rate on the consolidation loan is calculated by a weighted average of the rates on the loans that are being consolidated. For this reason, a consolidation doesn’t usually result in you saving any money – it’s primarily for the convenience of having a single monthly payment. This is why they are considered consolidation loans, rather than refinances in the traditional sense.
It also means that the new loan is likely to have a monthly payment that is the same as the combined payments on your current student loans. However, you can decrease the monthly payment by extending the term of the consolidation loan such that the new payment is lower and more affordable. But by increasing the term, the interest will be charged over a longer space of time, resulting in your paying more for the loan in total.
One big advantage to direct student loan consolidations is that you don’t need good credit to qualify for the loan. Because it is a federal government loan that is only combining existing loans, you’ll still be eligible for consolidation even with fair or poor credit.
You can do a consolidation your federal student loans through the US Department of Education at Student Loans.org.
Student Loan Refinance
Student loan refinances are offered by private (non-government) lenders. You can use them to consolidate and refinance both federal student loans and private student loans. Though they provide the opportunity to consolidate several student loans into one loan, they also offer an opportunity to lower your interest rate compared to the average rate that you are paying on several student loans right now. And that of course can also result in a lower monthly payment, even without increasing the term of the loans that you are currently paying.
The downside however is that you will be credit qualified for a student loan refinance, which means that your rate will be will be determined by your credit worthiness as a borrower. That will include a combination of factors, including credit history, income, job history, and debt-to-income ratio (DTI). It is possible that your interest rate will be higher than what it is on the weighted average of your current student loan debts if your credit profile is judged to be less than optimal.
Student Loan Refinance Lenders
There are several private sources you can turn to in order to refinance your student loan debts. You can try your own bank, or banks in your area, but you should be aware that most banks don’t do this kind of loan. There are however several lenders who handle student loan refinances on a national basis.
Two of the more popular student loan refinance companies are CommonBond and SoFi.
CommonBond is a web-based crowd-funding platform that specializes in providing and refinancing student loan debt. You can borrow up to $220,000 and it comes with very attractive interest rates. There is a limitation however – you must be a graduate student to use the loan program. In that regard, CommonBond will finance the cost of your graduate education and also allow you to refinance student loan debt accumulated in the pursuit of your undergraduate education.
SoFi is perhaps the best known of the web-based student loan refinance companies. SoFi not only offers very attractive pricing on its refinances – at terms up to 20 years – but they will also allow you to include all of your outstanding student loan debts in the new loan. You must have excellent credit, hold a degree, and have solid employment. And while SoFi offers loans to graduates of a large number of schools, it will not extend credit if you are attending or have graduated from a school that’s not on their list of eligible institutions.
You can also search several lenders at one time with Credible.
Why Refinancing May Not Be Right For You
As anxious as you may be to refinance your student loans, there are several situations where this can actually work against you:
If you have a less than stellar financial profile. Private lending sources will require you to credit qualify for a refinance. If your income, credit, and job histories are where they need to be, you will get an advantageous refinance. However, if your financial profile is fair or poor, you may not be able to refinance at all, let alone get a lower interest rate.
Rates on private source loans may not be lower than what you’re paying now. It is entirely possible that the weighted average of interest rates you’re paying on your current student loan debts is lower than the best rates that are available now. You might still qualify for a private source consolidation, but that won’t lower your interest rate, or necessarily your monthly payment.
Federal loans have certain benefits if you’re unable to make your payments. If you’re struggling to make your monthly student loan debt payments, federal student loans come with relief programs. One is the Income-Based Repayment program, or IBR. It caps your monthly payment at as low as 10% of your discretionary income, and can be discharged in as little as 20 years. Another is the Pay As You Earn (PAYE) program, which offers similar relief to the IBR. If you refinance federal loans through a private loan, these relief benefits will be lost.
You’re working in a public sector job. The federal government offers its Public Service Loan Forgiveness Program (PSLFP) for federal student loans only. Under the program, you may qualify for forgiveness of the remaining balance due on your eligible Federal Direct Loan Program (FDLP) loans after making at least 120 monthly payments while being employed on a full-time basis in an eligible public service occupation. Refinance your federal student loans into a private loan, and that benefit will disappear too.
Private student loan lenders often provide certain relief benefits, however they’re typically not as generous as those that come with federal student loans. For example, SoFi offers an Unemployment Protection program. Under the plan, your loan repayments can be suspended for up to 12 months if you are unemployed through no fault of your own. During that time SoFi will provide you with job hunting assistance.
In most situations, the value of a refinance is primarily its ability to save you money through reduced interest rates or lower monthly payments. But that metric is not entirely reliable when a refinance includes federal student loans. You may find that the benefits that you are surrendering by replacing a federal loan with a private one won’t justify the savings that the refinance will provide. This is especially true in an economy and job market that isn’t as stable as it once was.
Crunch the numbers, certainly, but be sure you are fully aware of what you are giving up before you include federal student loans in a private source refinance package.Topics: Education