Should I consolidate or refinance my student loans?

Should I consolidate or refinance my student loans?

Maybe. The goal of a consolidation loan is to combine multiple smaller loans into one large loan. This allows you to make one convenient monthly payment and address all of your student loans rather than making 10 or 15 smaller payments every month. While consolidation may make your bookkeeping efforts easier, it may not provide you with financial benefits.

What Do You Need to Know About Student Loan Consolidation

First of all, it is important to know that there are several types of consolidation options out there. The one you choose will depend on the type of student loans you have.

Federal student loan borrowers can take advantage of the Direct Loan Consolidation option. This is a federal option that makes it fairly easy to consolidate your federally backed student loans. It is the ONLY option for these types of student loans. There are two types of consolidation loans. The type of consolidation loans available to you depends on whether you have federal or private student loans.

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It is important to note that consolidating your federal student loans with a Direct Consolidation Loan will NOT lower your interest rate. It is a weighted average of all of the interest rates you have with your current federal student loans. The good news is that it is a fixed rate, so your monthly payment will not vary as it does with older student loans.

Not sure if your loan is a federal loan? Visit the National Student Loan Data System ( to see if your loan is listed here. If it is, it is a federal loan.

Private student loans are not eligible for consolidation under the Direct Consolidation Loan option. For these loans, you need to obtain a consolidation loan through a private lender. You can choose to consolidate either private student loans, federal student loans or a combination of the two with a private consolidation loan. However, if you choose to consolidate your federal loans under a private consolidation loan option, you may lose some of the benefits that having a federal loan offers. These benefits include deferment, forbearance, and even student loan forgiveness options.

The important thing to remember is that even if you have a strong financial position and won’t benefit from an income driven repayment plan or are unlikely to have your loans forgiven, if you choose to refinance your federal loans using funds from a private lender, you will not be able to return your student loans to a federal status. Once you go private, it will remain so until you have repaid the balances in full. However, if you are not eligible for many of the benefits that a federal student loan can provide, you may find that you can refinance your debt into a lower interest rate than a federal student consolidation loan will afford you, helping you keep more of your money in the bank, where it will do you the most good.
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