Student loan refinance and consolidation is a way for many students to save money on their loans and make management easier. But it’s not always the right choice for everyone. Here we’ve gathered common questions about refi and consolidation.

What is student loan consolidation?

Student loan consolidation involves combining multiple student loans from different lenders into one single loan from a single lender.

What is student loan refinancing?

Student loan refinancing involves taking a new loan to pay off one or more of your existing loans. You can refinance a single loan or multiple loans. The new loan has a completely different set of terms, including a new rate of interest, new monthly payments and new loan life.

Is refinancing and consolidation the same thing?

No, these are two entirely different processes, with a different requirements and different pros and cons.

What exactly is the difference between refinancing and consolidation?

In student loan consolidation, you are essentially bundling up several loans into one loan for the purpose of simplifying the repayment process. Instead of making multiple payments to different lenders on different days of the month, when you consolidate your loans you just have to remember to make one payment every month to one lender.

In student loan refinance, you are in fact taking a new loan to pay off one or more of your existing loans. You may opt for refinancing as a way to lower your interest rate, or lower your monthly payments.

What are the pros and cons of student loan consolidation?

The biggest benefit of student loan consolidation is that you only have to keep track of one monthly payment to be made on one day to one lender. This simplifies your monthly payments and lowers the risk of missed payments or defaulting on your payments.

While there are generally no downsides to consolidating, the only thing you need to be careful about is choosing which loans to consolidate. Some federal student loans are associated with specific forgiveness programs and should not be considered for consolidation. You will lose the forgiveness benefits if you consolidate these loans with your other student loans.

What are the pros and cons of student loan refinance?

If you have high interest rate loans, refinancing to a new loan with a lower rate of interest will save you a considerable amount of money. Refinancing is also a great option if you are looking for a way to lower your monthly payment. When taking the new loan, talk to the lender about extending your repayment term. This will automatically lower your monthly payments.

Unfortunately, the downside of extending the life of your loan is that you’ll pay much more by way of accrued interest. So over the longer term, your loan will work out to be much more expensive. Another downside is that you could lose the benefits of income-driven repayment plans. You will also lose the benefits of Federal Student Loan Forgiveness programs if you refinance loans that qualify for forgiveness.

Is it easy to be approved?

Getting approved for consolidation is easy as it simply involves combining your existing loans.

Getting approved for refinancing is a little more difficult. You need to meet certain requirements in order to get approved. In most cases, your refinance application will only be approved if you have a good credit score. Earning a steady income and having a low debt-to-income ratio will also boost your chances of getting approved for refinancing.

How are the interest rates calculated?

For consolidated loans, the interest rate is calculated as the weighted average of the interest rates of all your existing loans. Lenders will round it up to the nearest 1/8%.

For refinanced loans, the interest rate will depend on your credit history, and your debt-to-income ratio. Different lenders calculate it differently so it makes sense to shop around so you can benefit from the lowest rate of interest.

Is consolidation or refinance the right choice for me?

Student loan consolidation may be a great solution for you if you find yourself struggling to keep track of multiple monthly payments. In this case, consolidating your loans into one is far better than risking late or missed payments, which will impact your credit history and result in other far-reaching consequences.

Refinancing allows you to benefit from lower interest rates and/or lower monthly payments but it is an excellent solution only if you do not plan on using of any associated perks such as income-driven repayment plans or federal forgiveness programs.

Student loan refinancing is a good idea if you have private student loans or you have federal loans and don’t plan on taking advantage of a federal forgiveness program or income-driven repayment plan. You also need strong credit and a steady income to qualify for refinancing.

The biggest benefit of student loan refinancing is receiving a lower interest rate than your previous loans, which saves you money over time.

Are there fees involved?

Fortunately, lenders don’t charge processing fees for refinancing or consolidating student loans. However, it is always a good idea to check with the lender before you sign any agreement. Some lenders may offer extremely low interest rates and attractive terms and conditions, which they offset by charging higher administration fees.

Can I consolidate or refinance private and federal student loans together?

Yes, private and federal student loans can be consolidated or refinanced together. However, consider your other options beforehand. Keep in mind, federal student loans offer a wide range of benefits that private student loans do not. When you refinance or consolidate your federal and private student loans together, you lose the benefits of your federal student loans such as opting for income-based repayment plans, deferring payments during hardships or qualifying for forgiveness.

Are there any grounds for rejecting my consolidation or refinance request?

Luckily, student loan consolidation does not have any prerequisites. It’s uncommon for companies to reject consolidation applications.

On the other hand, lenders are more likely to reject refinance applications if you do not meet their requirements. Every lender assesses refinance applications differently, however, the bottom line is they will only approve if you can provide supporting proof to show that you will be able to repay the loan. The main factors that may result in a rejection are if your credit score is too low, you do not have a steady income or your debt-to-income ratio exceeds 50% of your monthly earnings.