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A Guide to Refinancing vs. Consolidating Student Loans

You’ve finished your degree—now it’s time to finish those student loans. Student loans can be one of the biggest financial burdens for graduates. “Refinancing” and “consolidating” are both terms used when discussing student lending. While they have different meanings, they both serve a common purpose of making student loans easier. Both combine multiple loans into one single loan with one monthly payment.

What is student loan consolidation?

Consolidation oftentimes refers to federal student loans. A Direct Consolidation Loan from the federal government allows you to consolidate multiple federal student loans into one at no cost. This results in a single monthly payment for your federal student loans at one interest rate instead of multiple payments.

The Direct Consolidation Loan is only available for federal loans, not private ones. It has a fixed interest rate for the life of the loan that is based on the weighted average of the interest rates rounded up to the nearest one-eighth of a percent.

What are the pros and cons of student loan consolidation?

Federal student loan consolidation offers many benefits, such as maintaining federal protection, easier payments, and lower monthly payments. With a Direct Consolidation Loan, you’ll maintain income-based repayment terms. This means that your monthly payment amount may change if your income or family size changes.

Consolidating your loans into a Federal Direct Consolidation Loan can qualify you for federal protections and benefits such as Public Service Loan Forgiveness (PSLF). PSLF allows a Direct Loan to be forgiven after 120 qualifying monthly payments.

In exchange for lower monthly payments, however, extending the term may increase the overall total cost of the loan. Depending on your goals, lowering your monthly payments could still be the right move for you.

What is student loan refinancing?

Refinancing student loans usually refers to using a financial institution to pay off existing student loans (federal or private). Your bank or credit union will pay off your existing student loans and combine them into a single new loan. Instead of paying multiple federal or private loans, you’ll pay off that single new loan.

What are the pros and cons of student loan refinancing?

Let’s dive into the pros and cons of refinancing student loans. First off, when you refinance federal loans, you are no longer entitled to its repayment options and borrower benefits. This means forgoing things like income-based repayment, unemployment deferment, loan forgiveness progress, a grace period, and debt cancellation.

With private student loan refinancing, however, you can potentially lower your interest rate or monthly payment depending on the repayment terms you select. Keep in mind that a lower monthly payment may come with a longer repayment term, and thus increase the long-term interest paid. Figure out if a lower monthly payment is right for your goals. The pros and cons of refinancing student loans depend on your unique situation.

Finding the best path forward for your student loans

To recap, refinancing your student loans could help you pay your loans off sooner or save on your monthly payment. We know that everyone’s student loan situation is unique, and figuring out where to start can be tough.

At MIT Federal Credit Union, we offer personalized support through one-on-one consultation for all financial aid questions for parents, students, and college graduates entering loan repayment. Schedule an appointment or explore our loan options and free resources online today.

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