Consolidation simply means combining multiple loans with different interest rates and payment plans into one loan with one payment plan and one interest rate. Technically speaking, the refinancing discussed above is a form of consolidation in which private and / or federal loans are combined by a private lender. Can consolidated student loans be refinanced?
Student loan consolidation: the basics
Federal student loan consolidation is the process of combining federal student loans into a new federal student loan called Direct Consolidation Loan. Only federal student loans (not private student loans) are eligible for direct loan consolidation. Which student loans are eligible for federal student loan consolidation?
Most federal student loans are eligible, including Stafford direct subsidized loans, Stafford direct non-subsidized loans, PLUS PLUS direct loans, federal consolidation direct loans, and federal family educational loans (FFELs).
Student loan consolidation and refinancing student loans: interest rates
- Student loan consolidation: Thanks to federal student loan consolidation, the interest rate is not falling. Rather, it is a weighted average interest rate on existing federal student loans rounded to the nearest 1/8%.
- Refinancing a Student Loan: The student loan refinancing interest rates are currently extremely low and start at 1.9%. Thanks to good or strong creditworthiness and recurring income you can get a lower interest rate, which can save thousands or tens of dollars on student loans. Thanks to refinancing a student loan you can also choose a fixed or variable interest rate and loan repayment period from five to 20 years.
When is it worth consolidating student loans?
Consolidation makes sense if your goal is:
- Combine multiple federal loans into one, but don’t repay private student loans with a new loan.
- Get access to extended repayment plans that allow you to pay back loans for up to 30 years.
- Make PLUS Family Loans eligible for an income-based repayment plan and Forgiveness Public Service Loans from which no other loan qualifies otherwise.
How to consolidate student loans
You can consolidate student loans through many financial institutions, including your local bank or credit union, as well as lenders specializing in this type of loan. Earnest, LendKey and SoFi are among the well-known names in this area.
For more information on federal loan consolidation steps, please visit the Federal Student Assistance website.