Combining several student loans into one new loan or refinancing an existing loan may help you reduce your monthly payment or lower your interest rate. Before you decide, it’s important to understand the benefits and impact. The following information was created to help you make an informed decision.
Consolidation vs. Refinancing
Federal Student Loan Consolidation allows you to consolidate (combine) multiple federal education loans into a new Direct Consolidation Loan to lower your monthly payment, gain access to federal forgiveness programs, or simplify your loan repayment. To learn more about federal student loan consolidation, visit StudentAid.gov.
Private loan refinancing allows you to take out a new loan to pay off one or more of your current student loans and streamline the repayment process. Refinancing may provide a lower interest rate, extend your repayment timeline to help minimize borrowing costs, or make your monthly payment more affordable. Refinancing is only available through private lenders, and you may lose key benefits, especially if you include federal student loans.
Before Consolidating or Refinancing or Your Student Loans
Now that you understand the difference between federal student loan consolidation and private loan refinancing, you’ll want to determine whether either option is right for you.
Know Your Goal
Before borrowing, it’s important to understand your goal. Are you hoping to reduce your interest rate or monthly payment? Perhaps you would like to simplify repayment? The options and benefits of federal student loan consolidation and private loan refinance vary depending on whether you are consolidating into Federal Direct Loans or refinancing into a new private student loan. Questions to ask yourself before you consolidate or refinance your student loans:
- Are your monthly payments manageable? If you have trouble making your monthly payment, have exhausted your deferment and forbearance options, or you are trying to avoid default, consolidation or refinance may help you.
- Are you making multiple payments? If you make payments to more than one lender every month, and want the convenience of a single monthly payment, consolidation or refinance may be right for you.
- What are the interest rates on your loans? Consolidating variable-rate loans into a fixed rate or refinancing higher-interest-rate loans into a lower rate may be a reason to consider consolidation or refinance.
- How much are you willing to pay over the long term? Like a home mortgage or car loan, extending the years of repayment increases the total amount you have to repay.
- How many payments do you have left on your loans? If you are close to paying off your student loans, it may not be cost effective to consolidate or extend your payments.
- What benefits, if any, will you give up if you consolidate or refinance? Be sure you understand the pros and cons of taking out a new loan, as you may losef certain benefits, especially if you plan to include a federal student loan in your private loan refinance.
Know What You Owe
To help you decide whether student loan refinancing is right for you, use this worksheet to gather your loan information. To locate your federal loans, visit StudentAid.gov and login using your FSA ID (the username and password you used to file the FAFSA). To locate your private loan history, you can visit your servicer’s website, or request a free copy of your credit report at www.annualcreditreport.com.
Understand Your Credit Rating
It is important to understand your credit score and credit history, as it will be used to determine your eligibility and interest rate. You can obtain your free annual credit report at www.annualcreditreport.com. Credit scores are available for an additional fee; however, many financial institutions provide free credit scores.
Consider the Long-Term Cost of Borrowing
It’s important to weigh the short-term benefit of reducing your monthly payment along with the long-term impact of paying more interest over time. In some cases, extending your repayment term may help you achieve other financial goals, such as buying a home, starting a business, or saving for retirement. If your financial situation improves, most lenders allow you to prepay without penalty, reducing the total amount of interest paid over time.
Tools for Making an Informed Decision
Private Loan Refinancing: Things to Consider
Before deciding whether to refinance your private education loans, it is important to understand all of the factors involved.
Private Loan Refinancing: Making the Decision
Take a look at how your loan information impacts the decision of whether to refinance.
Federal Loan Consolidation Calculator
Estimate your repayment period, interest rate, and repayment schedule if you consolidate your federal student loans with this federal loan consolidation calculator.
Frequently Asked Questions
What is APR and how is it different from the interest rate?
The Annual Percentage Rate (APR) is the total cost of the loan, including the interest, fees and other charges, expressed as an annual percentage. The interest rate, which is the rate you pay to borrow money, is expressed as a percentage of the principal.
Should I look for a student loan with a fixed or a variable interest rate?
It depends. Consider:
Fixed-rate student loans:
- May carry a higher rate than variable-rate student loans
- Are not impacted by interest rate changes
- Provide consistent monthly payments for the life of the loan
Variable-rate student loans:
- Are impacted by interest rate changes
- Rates can change as frequently as monthly or quarterly and could change significantly over the typical repayment period of 10 to 15 years
- May actually be less expensive than a fixed-rate loan depending on the interest rate environment over the payback period
Which type of rate, fixed or variable, is right for me?
It depends. If you can pay off your loan quickly, a variable-rate loan may be more affordable over time if the rate is lower than available fixed rates. The longer it takes you to pay off the loan, the more opportunity there is for variable interest rates to change. You may lower the risk of your interest rate increasing by looking for a lender that caps the variable rate.
A fixed-rate student loan may make it easier to plan and budget, as your monthly payment will remain the same for the life of the loan.
How are variable interest rates determined?
Variable interest rates are often tied to common indices like the Prime Rate or SOFR (Secured Overnight Financing Rate) and can change as frequently as every 30 to 90 days. For example, for loans with a rate tied to the Prime Rate, when the Prime Rate goes up, the interest rate of a variable student loan subsequently rises, and when the Prime Rate goes down, the interest rate will subsequently decrease.
Are fixed rates stable (remaining the same) through the life of the loan?
Yes. The fixed interest rate remains constant throughout the life of the loan. In a rising-interest-rate environment, this can be comforting. In a decreasing-interest-rate environment, this can be concerning.
What is the estimated time it takes from the date of online loan application to approval of the loan?
An online application takes approximately 40 to 60 minutes to complete and initial approval is often determined at that time. There may be some loans that require additional review or income verification before receiving a final approval.
Am I eligible to refinance or consolidate my student loans with the Maine Private Education Loan Network lenders?
You may be eligible if you meet certain requirements such as:
- You have at least $10,000 in student loans to refinance, which can include private student loans from other lenders and/or your federal loans like Direct, PLUS, or Stafford loans.
- You are a Maine resident, graduate of a Maine high school, or attended a Maine college or university; and
- You meet credit criteria for loan approval.
What should I do if I cannot afford to pay my student loans?
If you are struggling to make your monthly payment, contact your servicer immediately. They can help you avoid delinquency and default. If you have already defaulted, your servicer can also help you get your loans back into good standing. Learn more at StudentAid.gov.
Apply for Private Education Loan Refinance
Now that you’ve considered all the benefits and implications, perhaps you’ve decided that student loan refinance is right for you. A great place to start is with the Maine Private Education Loan Network, a group of local Maine lenders you know and trust. Learn more and apply now.
