Americans have amassed more than $1 trillion in student loans, a debt load that has squeezed the budgets of tens of millions of former students. Fortunately for indebted borrowers, there are some strategies for simplifying — and even lowering — monthly payments.

Juggling payments of multiple federal loans? Consolidation might ease the management of loans. Saddled with high-rate loans from private lenders? A refinancing can cut your interest payments. Of course, these moves can have their advantages and disadvantages. As anyone who has taken out a student loan can attest, borrowers must decipher a dizzying array of details, and every decision carries pros and cons. Read on to learn tips on how to navigate the refinancing maze.

Consolidation and Refinancing Pros and Cons

Consolidation of Federal Loans

Pros
  • No credit check

  • No income requirements

  • Simplify your payments

  • Keep deferment or forbearance options open

  • Lower payments if you lengthen the term of the loan

Cons
  • Weighted interest rate stays same

  • Servicer might stay the same — a drawback if you are not happy with the servicer

  • Lengthening term of loan means you’ll pay more interest

Consolidating and Refinancing with a Private Lender

Pros
  • Lower interest rates

  • Better customer service, potentially

Cons
  • Requires reasonably good credit

  • Requires income verification

  • You could lose deferment or forbearance options

  • Private lenders don’t offer income-based payment plans

Consolidation & Refinancing Defined

The term “loan consolidation&rdqui; might seem self-explanatory, but it is not. Loan consolidation has become a catchall term for two different ways of managing student loans. For purposes of explaining the options on this page, we’ll define ‘consolidation’ as the tactic used by borrowers with multiple federal loans of combining the loans into a single loan through the U.S. Department of Education’s Direct Loan Consolidation program. We’ll define the separate tactic of refinancing as the financial process of getting a new, lower rate for a loan, typically with a private lender. Sometimes, loans are consolidated and refinanced at the same time, but consolidation and refinancing have different advantages and drawbacks. The main advantage to consolidating federal loans is to simplify your life. Your overall interest rate stays the same; you just combine multiple payments into one. Refinancing, on the other hand, replaces old loans with a new one at terms that are more favorable to you. In the case of both consolidation and refinancing, the new loan satisfies the old debt but creates a new obligation for the borrower.

Why Consolidate?

If you have only a couple of federal loans, consolidation might not make sense. But if you have multiple loans, it might be easier to combine them into a single loan with one monthly payment. Another advantage: typically, consolidation lets you replace a variable interest rate with a fixed interest rate. Variable rates have been a great deal in the post-recession days of rock-bottom rates, but economists expect interest rates to start rising. A consolidation does not lower your interest rate; you pay a rate calculated on the weighted average rate of all your loans. However, you can lower your monthly payments by taking longer to pay back the loan, a process called ‘loan extension.’ You will pay less per month but more overall because you will be paying interest longer. Because of that trade-off, the U.S. Department of Education urges borrowers to carefully consider loan consolidation that extends the payback period. On the plus side, a consolidation might give you access to additional alternative repayment plans. Those alternatives also come at a cost: You might lose the original loan’s borrower benefits, such as interest rate discounts, principal rebates and some cancellation benefits.

What the Numbers Might Look Like

Let’s say you graduated with $30,000 in student debt. You have three federal loans for $10,000 each, one at 6.8 percent, one at 5.6 percent and one at 4.5 percent.

Your Current Loans

Loan Loan Amount Interest Rate Monthly Payment Total Interest Over 10 years
A $10,000 6.8% $115.08 $3,809.64
B $10,000 5.6% $109.02 $3,082.69
c $10,000 4.5% $103.64 $2,436.61

Your Options:

Option 1: Do nothing.

For the three loans, your monthly payments total $327.74. You’ll pay $9,328.94 in interest over 10 years.

Option 2: Consolidation.

If you combine your loans into one loan through the federal Direct Loan Consolidation program, you’ll pay the weighted average interest rate of the three loans (in this case, 5.633%), rounded up to the next eighth of a percent, so the new interest rate would be 5.75%. The new numbers would look like this:

Total Monthly payment Total Interest over life of the loan
Current Loans $327.74 $9,328
Loans consolidated with a 10-year term $329.31 $9,517
Loans consolidated with a 15-year term $249 $14,842

There’s not much point in consolidating with a 10-year term in this case. But by extending the term to 15 years, you could lower your monthly payment to $249.12. However, your total interest payments would balloon to $14,842.14.

Option 3: Refinancing with a private loan

If you have a job and good credit, you could refinance the loans with a private lender. Keep in mind that the super-low rates advertised by lenders are for five-year loans and not 10-year loans.

Interest Rate Total Monthly payment Total Interest over life of the loan
Current Loans Varies $327 $9,328
Loans consolidated with a 5-year term 4.5% $563 $3,762
Loans consolidated with a 10-year term 4.79% $315 $7,815

In this scenario, a private refinancing might be the best choice — with the caveats that you’ll need strong credit to qualify for the best deals, and that you’ll give up the option of switching to an income-based repayment plan sometimes available for former students paying back federal loans. The programs offered on federal student loans to borrowers struggling with their monthly payments are much more forgiving than those available for those who hold private loans. For example, if you happen to lose your job or face other financial difficulties in the future, it is much easier to get approved for forbearance with federal loans.

Which Student Loans Can Be Consolidated?

  • Direct subsidized loans
  • Direct unsubsidized loans
  • Subsidized and unsubsidized Stafford loans
  • Direct PLUS loans
  • Supplemental loans for students
  • Perkins loans
  • Nursing loans
  • Health education assistance loans

These loan cannot be consolidated with federal loans:

  • PLUS loans taken out by a student’s parent
  • Private student loans cannot be consolidated

If you are in default on your federal loan, it can still be consolidated, but only after you negotiate a repayment plan with your loan servicer.

Requirements for Consolidating or Refinancing Your Student Loans

Few bureaucratic barriers prevent you from consolidating your federal student loans. You don’t have to pay an application fee, get a credit check, or meet minimum income requirements. At least one of your loans must be either a direct loan or Federal Family Education Loan. Full-time students may not consolidate their loans, but once you graduate, leave school or drop below a half-time course load, your loans are eligible for federal consolidation.

If you choose to consolidate loans through the federal government, you need not worry about credit checks or debt-to-income ratios. But if you prefer to refinance with a private lender, you’ll need to prove your creditworthiness.

In general, lenders will look at:

  • Your income and employment

  • Your debt-to-income ratio

  • Your credit score (or some alternative version of a credit score)

Requirements vary by lender. Some lenders refinance only private loans, others refinance both federal and private loans.

Lenders don’t readily disclose their credit requirements, but if you refinance through a bank or credit union, you’ll probably need a FICO score of 680 to 700 and a debt-to-income ratio of 35 percent or less. A new breed of lenders, including Earnest and SoFi, say they don’t use traditional credit scores, instead relying on algorithms that consider your income and bank balances. “Most traditional lenders wouldn’t look at an application that had either a default or extra-long late periods,” says Earnest’s Alan Cooper. His company does consider borrowers with credit blemishes. Even with an alternative lender, your income and financial responsibility will affect your chances for approval.

Income requirements vary by lender. At Citizens Bank, the minimum income requirement to refinance is $24,000, although a co-signer and the borrower can combine incomes to meet this requirement.

Refinancing Federal Loans with a Private Lender

Different lenders have different rules about which types of loans they’ll refinance. Banking giant Wells Fargo, for instance, refinances private loans but not federal loans. Alliant Credit Union has a similar policy. But others, such as online lender Earnest, will issue a private loan to pay off a federal student loan.

There’s no shortage of private lenders vying for your business, and many of them say they’ll match the forbearance and deferment benefits that are built into federal loans. “We match all federal policies on forbearance and deferment,” says Earnest’s Cooper. “The one thing we cannot match is income-based repayment.” For that reason, you must take a hard, realistic look at your job prospects. If you’re comfortable that you’ll make enough to repay your refinanced loan, refinance away. But in some cases, a modest monthly savings isn’t worth giving up the security of the federal hardship benefits. If you’re in an unstable industry, or at a company with shaky prospects, or you face health issues that could affect your employability, stick with the safety net of the federal loan.

Seek rate quotes from three lenders whose programs match the types of loans you have. As of October 2015, private lenders offered rates starting at 1.9 percent for variable-rate loans and 3.25 percent for fixed-rate loans. The rate you’ll actually pay depends on a variety of factors. The longer the loan period, the higher the interest rate. For example, if you refinance into a five-year loan, you’ll pay a lower rate than you would if you chose 20 years to repay. Your credit history also affects your rate — in fact, whether you will qualify at all.

How to Apply for Student Loan Consolidation

Step 1

To apply for a Direct Consolidation Loan, visit StudentLoans.gov.

Step 2

Create a Federal Student Aid ID.

Step 3

After you sign in to StudentLoans.gov, complete the Federal Direct Consolidation Loan Application and Promissory Note. The form requires you to submit personal information.

Step 4

Identify the loans you want to consolidate along with any loans that you owe that will not be included in the consolidation. You can complete the electronic application, or you can download and print a paper application and mail it.

After you submit your application, the government will assign a servicer for your loan and provide you with the information for the new loan. Remember to keep making payments on the loans you want to consolidate until your consolidation servicer tells you that the underlying loans have been paid off.

For advice on consolidating your loan, call your student loan servicer or try the Education Department’s Loan Consolidation
Information Call Center at 800-557-7392

A Vet Shares His Refinancing Experience

Andrew Josuweit turned his student loan nightmare into a business. Frustrated by the debt maze, in 2012 Josuweit launched StudentLoanHero.com, which calls itself a neutral platform for organizing, managing and repaying debt.

You’ve refinanced a student loan. How did it work?

I graduated in 2009 with $74,000 in debt. I couldn’t find a job, so I decided to start a software development company. In my first year, I made $13,000, and I couldn’t afford to repay my student loans for three years. I went into default, and my credit was ruined. I incurred more than $30,000 in interest. At the worst, I got up to $107,000 in debt. The root problem for a lot of people is their income isn’t what it should be. Now that I’m making more money, I’ve paid down my student loans to $90,000. I recently refinanced a loan from Sallie Mae to Earnest. The total debt was $28,942, and my interest rate dropped about 1 percentage point, to 5.93 percent. My new term is 10 years. I’ll save close to $1,500. Nothing crazy, but I was able to move away from Sallie Mae.

Why did you want to switch from Sallie Mae?

A lot of people just hate working with Sallie Mae. If you log into Sallie Mae’s website, it’s really hard to find out your interest rate. What’s the most important thing a borrower wants to know? The interest rate. It’s also hard to find out how long you have until your loan is paid off. They don’t tell you how much is going to principal vs. interest. There’s no transparency. When you look at Earnest or SoFi, the customer experience is so much better. The model is to cross-sell other products to consumers as they mature. If you’re going to cross-sell, you need your borrowers to be financially sound.

What’s the main difference between loan consolidation and refinancing?

Consolidation is offered by the federal government as a way to simplify your payments. Consolidation doesn’t change your interest rate; all your loans are combined into a weighted average rate, so you’re still paying the same amount. Refinancing is done with a private lender, and it lets you lower your interest rate, especially if you have high-rate private loans.

How do I know which option is best for me?

You need to consider your employment stability. Ask yourself, “Am I going to lose my job?” The federal government has deferments and income-based repayment programs, so if your income goes down, you can adjust your payment. Private lenders aren’t as generous with deferments and income-based repayment. Ideally, you’re going to refi any high-interest loans. A lot of people have private student loans at 12 percent. If you’ve got any really high rates, you want to try to get those rates down. Shop two or three lenders for the best rate.

Do I need good credit to consolidate or refinance?

For a consolidation, the federal government doesn’t look at your credit score or debt-to-income ratio. For a refinancing, the lender looks at your debt-to-income ratio and your FICO score. They don’t tell us the exact debt-to-income ratio, but we think it’s similar to the debt-to-income ratio to qualify for a mortgage, which is 35 percent. As for FICO scores, most lenders require a score of 680 for a refinancing. Earnest doesn’t use credit scores, but they’re looking at a ridiculous amount of data points. They’re also looking at the overall trend of your debt load and your income. My income was going up, so I was able to refinance even though I’ve missed payments in the past.

Does it cost anything to consolidate loans?

The process is free. I’d start with studentloans.gov or call your servicer. They can help you with the process. Consumers have to be careful. There are a lot of consolidation shops out there that charge you $400 to $600. Maybe you think it’s worth it so you don’t have to deal with the hassle, but I don’t think anyone should pay $400 to $600.

Refinancing a mortgage can be expensive. What about refinancing student loans?

It’s completely free to the consumer. There are no origination costs, there are no closing costs. Even if you don’t think you’re a good fit, you should make an inquiry. What’s the worst they can say?

Can I refinance to remove a co-signer from the loan?

Yes. Refinancing is a great way to get a co-signer off a loan. My parents co-signed my loans, and when I defaulted, their credit took a huge hit. They own a business with a line of credit, and there was a point where they were very concerned they weren’t going to be able to expand their business. It was a rough period in our relationship. I still have two co-signed student loans. From a strategy perspective, I should probably hold onto them, because the interest rate is only 2 percent. But the downside is my parents need to free up credit. It’s kind of a moral dilemma: Do I save money, or do I help out my parents by refinancing into a more expensive loan?

Can someone refinance more than once?

There’s nothing stopping you. If you have a big change in your debt-to-income ratio for the better, it might make sense, because you could refi into a lower rate. It also depends on the magnitude of your loans. If you’ve got $200,000 or $300,000 in student loans, and you can save half a point, maybe you want to refinance. If you’ve got a smaller loan, you’re not going to save much.

Private Lenders That Refinance Student Loans

Alliant Credit Union

This financial institution touts its nonprofit status as proof that it is not looking to gouge you. Alliant lets you refinance up to $75,000 in undergraduate loans and up to $100,000 for grad school. Only private loans are eligible. Rates start at 6 percent.

Best for: Graduates with high-rate private loans and good credit.

Citizens Bank

This bank will refinance federal and private loans in amounts ranging from $10,000 to $170,000, depending on your level of education. Rates start at 2.34 percent for variable interest rates and 4.74 percent for fixed loans. The minimum income requirement to refinance is $24,000, although a co-signer and the borrower can combine incomes to meet this requirement.

Best for: Graduates with large balances.

CommonBond

An online lender launched in 2011, CommonBond lets students refinance up to $500,000. CommonBond says it uses two “bank partners” that run credit checks. Rates start at 1.95 percent for variable loans and 3.74 percent for fixed-rate loans.

Best for: Borrowers with large balances.

Darien Rowayton Bank

This bank offers a variety of refi packages for students with bachelor’s and professional degrees. Rates start at 1.9 percent for variable loans and 3.5 percent for fixed-rate loans.

Best for: Borrowers with good credit.

Earnest

Another online lender, Earnest touts its nontraditional lending standards. Earnest doesn’t pull credit scores, instead relying on algorithms that analyze borrowers’ bank balances and payment histories. Earnest lets borrowers switch between variable and fixed-rate loans. Variable rates start at 1.9 percent, fixed rates at 3.5 percent.

Best for: Borrowers whose credit histories don’t fit traditional lending standards.

LendKey

This site matches borrowers with community banks and credit unions. Rates start at 1.93 percent for variable rates and 3.25 percent for fixed rates.

Best for: Bargain hunters who want to do business with a hometown bank.

SoFi

An online lender that uses nontraditional credit checks, SoFi offers unemployment protection for borrowers who lose their jobs. Fixed rates start at 1.9 percent for variable rates at 3.5 percent.

Best for: Borrowers whose credit histories don’t fit traditional lending standards.

Wells Fargo

One of the nation’s biggest banks, Wells Fargo refinances only private loans, not federal loans. The minimum amount is $5,000 and the maximum is $120,000. Variable rates start at 3.49 percent, fixed rates at 6.74 percent.

Best for: Graduates with high-rate private loans and good credit.

4 Biggest Mistakes Students Make When Consolidating or Refinancing Student Loans

Focusing only on getting lower monthly payments

Private lenders offer refinancing terms of up to 20 years. Federal consolidations let you extend your loan term for up to 30 years. These decades-long terms are tempting, because they allow for lower monthly payments. But they carry an expensive downside: You’ll pay far more interest over the life of the loan. You might even still be paying for your own education when your own kids enter college.

Failing to take advantage of today’s low rates

If you took a private loan before the Great Recession of 2008, you might be saddled with double-digit interest rates. If your income has been on an upward trajectory, you might be able to significantly reduce your monthly payment.

Paying fees to consolidate or refinance

The federal government and private lenders all make the same promise: Consolidate or refi with no fees. Yet some borrowers pay hundreds of dollars to companies that arrange consolidations and refinancing. Do the work yourself, and devote the fees to paying down your balance.

Giving up the federal safety net

Federal loans come with all manner of bailouts, including forbearance, deferment and income-based repayment plans. Private lenders say they’ll match the forbearance and deferment benefits, but they can’t offer income-based repayment plans. So before you refinance out of a federal loan, take a hard look at the stability of your income.

Do I Really Need to Consolidate or Refinance?

I have five federal loans. Should I consolidate?

Yes – especially if you’re not the most organized person in the world. Consolidating federal loans won’t save you money, but it does simplify your life by requiring just one payment a month.

I just got a sweet raise. Should I refinance?

Yes. To a lender, your raise makes you a better bet. Use your new leverage to lower the interest rate on your loans.

I have a six-figure debt. Does it make sense to refinance?

Probably. The bigger your debt load, the more you can save by refinancing to a lower rate.

My credit score is still in the toilet. Can I refinance?

Probably not. Traditional lenders won’t give you a loan if your credit score is below 680. But if you’re getting your finances on track, a new lender like Earnest or SoFi might be willing to take a chance on you.

Co-signer Caveats: What You Need to Know

Parents of college students have taken out billions of dollars in federal Parent PLUS loans, and lenders have begun to offer refinancing to parent borrowers. Refinancing can be especially attractive to parents for two reasons. First, the interest rate on federal loans to parents is higher than on loans to students — as high as 8.5 percent in recent years. That means parents could reap greater savings from a refi. Second, unlike their twenty-something kids, parents have had decades to build credit histories. If you boast a strong credit score, lenders will be willing to offer prime rates to refinance PLUS loans. One caveat: as parents near retirement, they should be be cautious about extending the term of student debt. Several lenders that refinance student loans also offer their services to parent borrowers, including Citizens Bank, Darien Rowayton Bank, Earnest and SoFi. Some lenders don’t allow students to include parents’ loans in a refinancing, while others allow refinancing Parent PLUS loans into the child’s name.

Updated: July 27, 2017