Student loan consolidation involves combining multiple federal student loans into a new policy. Student loans interest rates often rise with federal consolidation. Your new interest rate will be a weighted average of the student loans you combine, rounded up to the nearest one-eighth of a percent. This new rate will remain the same throughout your new loan’s entire life.
However, you may get a lower interest rate by combining loans through private loan consolidation — also known as refinancing. Student loan refinancing involves getting a new private student loan to pay for your existing student loans. You can combine federal and private student loans with refinancing. However, you may lose federal benefits when you refinance different loan types.
Here’s a closer look into the interest rate benefits of student loan consolidation and refinancing.
Student Loan Consolidation
Consolidating federal student loans involves applying for a Direct Consolidation Loan with the federal government. This new loan will combine your existing multiple student loans into one loan with a fixed interest rate for its whole life.
You may end up paying more interest because the rate is an average of your multiple student loans. In addition, student loan consolidation usually increases your payment period. So, you will likely end up paying more interest than the principal balance you borrowed to pay for your existing student loans.
In terms of your consolidation loan’s principal balance, it will carry any outstanding interest from the loans you combine. Consider that you may end up with a higher principal balance, on which interest will accrue.
Also, be sure to review the borrower benefits you may have with your separate federal student loans. Some loans may have interest rate discounts that you will forfeit if you go ahead with consolidating them into a new loan.
Student Loan Refinancing
You can refinance your student loans with a private lender, on the other hand, for a lower interest rate. Like consolidation, refinancing student loans allows you to combine multiple loans into a new policy, giving you the convenience of making single monthly payments for student loans.
You may get a lower interest rate if you meet the eligibility requirements of the private lender you select for refinancing. Your new private lender will determine your new rate based on your credit standing and financial situation as a private institution. Consider refinancing if you are in better financial and credit conditions than when you first took out your existing loans.
However, you must understand that refinancing federal student loans with a private lender will turn your loans private. You will lose federal interest benefits associated with your individual loans when you refinance them. One relevant example may be the zero-interest accumulation on student loans during deferment.
Conclusion: How To Consolidate Student Loans for a Lower Interest Rate
You can potentially lower student loan interest rates when you combine student loans through refinancing. Unlike federal consolidation, private student loan lenders will base your interest rate on your credit score.
You may be in a better financial and credit situation now than when you first took out your student loans. So, you will have better chances of securing a lower interest rate. At the same time, you may qualify for a lower interest rate when you apply with a cosigner with good credit.
Be sure to shop for several private lenders to find the best refinancing deals that suit your situation before settling with one provider.