Consolidating vs. Refinancing: What’s The Difference and What’s Right For Me?

One of the most frequent questions we get from borrowers is about the difference between loan consolidation and refinancing. While both consolidation and refinancing can allow borrowers to simplify their payments, there are a number of important differences between the two. Understanding these differences can save you money and future headaches, so let’s break it down in detail.

What is Consolidation?

Consolidation allows you to combine multiple federal loans into one federal loan. It also allows you to change the type of loan to a Direct Consolidation loan so that it can be eligible for more federal programs. The new loan will have a fixed interest rate (calculated by taking the weighted average of the interest rates of the loans being consolidated and rounding up to the nearest eighth of a percent).

Why Would I Want to Do This?

1. Ability to enroll in additional savings and forgiveness programs. Consolidation allows you to change an older loan type, like a FFEL or Parent PLUS loan, into a new Direct loan. Direct loans are eligible for additional savings and forgiveness programs like Income-Driven Repayment (IDR) and Public Service Loan Forgiveness (PSLF).
2. Enrolling in an income-driven repayment plan helps reduce your monthly student loan payment by tying your monthly payment to your income. That means if you are currently unemployed, you could be paying as low as $0/month. Direct loans are eligible for each of the four available income-driven repayment plans. For example, even if you’re already enrolled in income-based repayment (IBR) on your FFEL loans, consolidating to Direct loans and enrolling in a different IDR plan could potentially lower your monthly payment!
3. Public Service Loan Forgiveness allows loans by non-profit and government employees to be forgiven after 120 months of qualifying payments. Only Direct loans are eligible for PSLF.
4. Simplify all your bills into one. Instead of managing multiple bills from your various loan servicers, consolidating gives you one loan with one monthly payment.
5. Receive CARES Act benefits. The CARES Act included numerous benefits for federally held student loans, including a payment suspension and interest waiver. Under the recently issued memorandum, the payment freeze and interest waiver from the CARES Act are extended until December 31, 2020. Many older loan types, including Federal Family Education Loans (FFEL) and Perkins loans, are not federally held and thus are ineligible for the CARES Act benefits. Consolidating these loans into a Direct loan will allow them to qualify for these benefits. One important thing to note is that consolidation can take several months for your loan servicer to process, so this isn’t an immediate fix.

Why Wouldn’t I Want to Do This?

1. Progress towards federal programs is erased. When you consolidate, it’s considered a completely new loan. If you have already made payments towards IDR and PSLF, consolidating those loans will erase your progress and you’ll have to start over in counting payments. That’s why it’s important to know which loans to consolidate (and which to not consolidate) so you don’t lose progress made towards IDR and PSLF requirements.
2. You may pay more over time. Although your monthly payments are lower, if your repayment plan is extended, you will make more payments and pay more in interest over time.
3. Outstanding interest will capitalize. If you have accrued interest on your loans, it will become part of the principal balance on your new consolidated loan. If you’re working toward eventual forgiveness, this may not be important to your overall repayment, but it’s helpful to know.

How do I do this?

Summer’s loan consolidation tool looks at your unique loan situation to help you properly identify which loans should be consolidated in order to qualify for certain income-driven repayment plans and Public Service Loan Forgiveness. Our tool ensures that you’re only consolidating the necessary loans, and leaving other loans alone.

What is Refinancing?

Refinancing combines all your private and/or federal loans into one private loan. This new loan will have different loan terms, including a lower interest rate. Not everyone is a candidate for refinancing, however. Lenders look at credit score, a low debt-to-income ratio, and a stable income when assessing a borrower’s eligibility.

Why Would I Want to Do This?

1. You can save money. Refinancing can give you a lower interest rate which means you will pay less on your loans. Different private loan servicers have different interest rates so we recommend looking at multiple lenders to find the lowest rate.
2. Flexible repayment schedule. Refinancing can allow you to change your monthly payments and the length of your loan term. If you extend your repayment timeline when you refinance, your payments will go down now, but you’ll pay more in total payments overall. If you shorten your repayment timeline, however, you’ll pay more now but less overall.
3. Simplify your payments. When you refinance, you are taking on a new loan with a new lender. You only have to pay your new company each month.

Why Wouldn’t I Want to Do This?

1. All federal benefits are lost. There are a number of benefits the government provides to federal student loan holders if they are struggling to make payments. Additionally, turning your federal loans into private loans makes you ineligible for federal programs like income-driven repayment and Public Service Loan Forgiveness.
2. Once your loans are private, there’s no going back. Changing your federal loans to private will keep them as private. There’s no way to convert a private loan back to a federal loan.

How do I do this?

Summer’s free refinancing tool is a great way to compare options to see which companies offer the lowest interest rate and best repayment schedule for your needs.

We know that it can be difficult to decide if consolidation or refinancing is right for you, and we are here to help. With Summer’s smart consolidation tool, we can help you decide whether consolidating your student loans is the right path for you. And if you’re looking to refinance, we can recommend the best companies to help you get started.

Join us today to get access to these tools and resources.