Should I consolidate or refinance my student loans? | Consumer Financial Protection Bureau (2024)

If you have federal student loans, you have the option to combine some or all of your federal student loans into a Federal Direct Consolidation Loan (Direct Consolidation Loan). If you consolidate non-Direct Loans into a Direct Loan consolidation, you gain access to protections and benefits available on Direct Loans, such as Public Service Loan Forgiveness (PSLF), which can eliminate the balance of your Direct Loans after 120 qualifying payments (10 years).

Federal loan consolidation will not lower your interest rate. The fixed interest rate for a Direct Consolidation Loan is the weighted average of the interest rates of the loans being consolidated, rounded up to the nearest one-eighth of a percent. While consolidating your loans may slightly increase your interest rate, it will lock you into a fixed interest rate, so your new payment, if based on a standard repayment plan, won’t change over time. However, if you don’t consolidate, your original Direct Loans, if issued after mid-2006, also have a fixed interest rate, so they won’t change over time either.

A private consolidation loan or student loan refinancing allows you to combine all or some of your private and federal student loans into one large private consolidation loan through a private lender or bank.

Private student loans may charge fixed or variable interest rates that are based on your credit history. Interest rates on private student loans can be fixed or variable. When you first take out a private student loan, you may have a limited credit profile. This means that, for many borrowers, private student loan interest rates can be quite high.

Some borrowers who have graduated, obtained a job, and built excellent credit may qualify to refinance their existing private student loans into a new private loan at a lower interest rate, especially during periods of low interest rates.

If you are approved to refinance or consolidate your existing private student loans into a new private loan, the terms of the consolidation loan might allow you to lower your interest rate, lower your monthly payment by extending the length of the repayment term (which may increase the total loan cost), or release a co-signer from your existing student loan—depending on the terms of the consolidation loan. It is important to evaluate the terms of a potential private refinance loan carefully before making your decision.

Here are some things to consider:

• Look closely at the APR. The monthly payment on your new loan might be lower, but the interest rate could be higher. This can occur because the loan term might be spread out over more years. Active-duty servicemembers should remember that they might also lose the 6 percent interest rate cap benefit under the Servicemembers Civil Relief Act (SCRA) if they refinance.
• Consider the tax consequences. If you refinance student loans into a new loan along with non-student loans into a personal loan consolidation, the refinanced loan may no longer be considered a student loan for the purposes of the student loan interest tax deduction. If you regularly claim this deduction, be sure to consider whether the new loan will allow you to continue to do so.

Consolidating federal student loans into a private consolidation loan has downsides as you will lose access to all the benefits and protections available on federal student loans. Weigh the benefits and risks of refinancing your federal student loan into a private student loan, since this type of consolidation cannot be reversed.

• Look closely if you are switching from a fixed rate loan to a variable rate loan. Interest rates for most federal loans have fixed rates, which means that you never have to worry about your interest rate and monthly payment going up if interest rates rise in the future. If you switch to a private variable rate loan, your interest rate could rise above the original fixed rate, and your payment could go up.
• Understand the impact of changing the repayment term. The lowest rates offered by private student loan refinancing programs are likely accompanied by shorter repayment periods. The shorter the repayment period, the higher the monthly payment.
• You will no longer qualify for certain repayment programs or plans. Federal student loans provide options for borrowers who run into trouble, including income-driven repayment (IDR). If you consolidate with a private lender, you will lose your rights under the federal student loan program, including deferment, forbearance, cancellation, and affordable repayment options .
• You will probably lose certain loan forgiveness benefits if you refinance. Borrowers working in public service or as teachers in certain low-income schools may be able to get loan forgiveness for certain federal loans. If you refinance your federal loan with a new private student loan, you will no longer be eligible to participate in these federal loan forgiveness programs. You may also lose the protection of loan discharge or forgiveness in the case of death or permanent disability, which you get with federal student loans. Many but not all private lenders currently offer loan discharge benefits or forgiveness in the case of death or permanent disability.
• Active duty servicemembers may also lose benefits on pre-service obligations if they refinance. If you are a servicemember on active duty, you are eligible for an interest rate reduction under the Servicemembers Civil Relief Act (SCRA) for all federal and private student loans taken out prior to the start of your service. If you consolidate your loans while serving in the military, you will lose the ability to qualify for this benefit.