If you’ve consolidated your student loans, you might be wondering if you can refinance student loans after consolidation. The short answer is yes; you can refinance consolidated student loans.
It’s not too late to take advantage of lower interest rates by refinancing. You can refinance consolidated student loans as easily as any other student loan. That said, this strategy isn’t always a smart move, especially since you’ll lose access to beneficial federal programs.
Here’s a closer look at consolidated student loans, how they’re different from refinanced loans and whether refinancing a consolidated loan is right for you.
Student loan consolidation vs. refinancing
Student loan consolidation and refinancing often get confused, and for a good reason. They’re similar in many ways. However, there are important distinctions you need to know, especially if you’re thinking about your loan repayment options right now.
Student loan consolidation
When borrowers mention student loan consolidation, it’s usually referring to a Direct Consolidation Loan. This type of consolidation doesn’t require a credit check, and is available through the federal government at no extra cost. A Direct Consolidation Loan allows you to consolidate multiple federal loans into one loan.
The benefits of consolidation include:
- Access to multiple repayment options including income-based plans
- One monthly payment through one loan servicer
- The ability to choose your federal loan servicer
- Longer repayment terms available
For all its benefits, consolidating isn’t all positive. When you consolidate student loans, your multiple loans are combined into one. The interest rate on your newly consolidated loan is calculated based on the weighted average of the loans you consolidated so you might pay more interest fees.
Consolidating also resets your qualifying payments if you’re pursuing forgiveness programs, like Public Service Loan Forgiveness — leaving you to start back at zero.
Student loan refinancing
When you refinance student loans, your old loans are paid off by a private lender, and it creates a new loan. Your new private loan provides new loan terms and a new interest rate, entirely. If you have several federal loans to refinance, you can combine them into one refinanced loan through a private lender.
Refinancing requires a credit check, and you must meet a lender’s credit and income requirements to qualify. Different lenders have different requirements.
Both refinancing and consolidation leave you with one loan payment, simplifying your loan repayment strategy going forward. The main difference between student loan consolidation and refinancing is that consolidation is through the federal government, and refinancing is through a private lender.
Refinancing a consolidated loan isn’t always the best option
Although refinancing student loans could lead to a windfall of savings long term, it might not be the best option right now. Interest on federal loans is suspended through January 1, 2021, due to the coronavirus pandemic.
Loan payments on student loans owned by the U.S. Department of Education are suspended until that time, too. The best option might be to do nothing for now and enjoy relief measures put in place.
Keep in mind that refinancing federal loans turns them into private loans. When you refinance, you lose access to federal protections like income-driven repayment plans, loan forgiveness and forbearance options. Only refinance if you don’t need access to these benefits now or in the future.
How to know if refinancing is the right option for you
Whether you should refinance your student loans depends on your current financial situation. The main goal of refinancing loans is to secure a lower interest rate. You’ll need established credit to qualify for lower rates.
If you have bad credit, or you don’t have access to a cosigner with strong credit, it’s best to wait until you have a willing, creditworthy cosigner or improve your credit score..
Your credit isn’t the only factor to consider, though. Refinancing federal loans works best when you have:
- A job in the private sector
- An established emergency fund
- Federal student loan debt less than 1.5 times your income
If this describes your situation, carefully consider your refinancing options before you make a decision. Most private lenders let you check rates without negatively affecting your credit. If you’re eligible for a rate lower than your current federal loan, refinancing might be a good option.
You can use our student loan refinance calculator to determine how much money you could save by refinancing. If there’s a chance you’ll need access to federal repayment programs or want to pursue loan forgiveness later on, hold off on refinancing your loans. Once you refinance, you lose access to those programs for good.
As you become more secure financially and establish better credit, you can refinance your student loans multiple times, if you qualify for lower rates.
If you’re unsure of the right repayment path for you, book a consultation with one of Student Loan Planner’s consultants. We’ve helped people like you navigate over $1.15 billion worth of student loan debt, can create a customized plan for you. There’s nothing more critical to your financial future than having a strategic student loan repayment plan.