Can You Refinance After Student Loan Consolidation?

Refinancing federal student loans that you’ve consolidated can save you money, but it will cost you borrower protections like access to loan forgiveness and income-driven repaymentIncome-Driven Repayment (IDR)A category of federal student loan repayment plans that calculate monthly payments based on income and family size rather than loan balance. Any remaining balance can be forgiven after 20–25 years of qualifying payments. plans. Refinancing a consolidated student loan can be a good idea if you qualify for a lower interest rate. But moving your loans from the federal government to a private lender will cost you access to programs offered by the U.S. Department of EducationU.S. Department of Education (ED)The federal agency that oversees federal student aid programs, issues regulations for federal student loans, and is the ultimate lender on Direct Loans.. If you’re considering refinancingRefinancingTaking out a new private loan to pay off one or more existing student loans, usually to lower the interest rate or change the repayment term. Refinancing federal loans into a private loan eliminates federal benefits like IDR and PSLF. to save money over the life of the loan, you may want to hold off on taking advantage of that new interest rate right now. The interest-free payment pause for federal student loans will continue until August 31, 2022. If you refinance now, you’ll have to start making monthly payments immediately. It’s a good idea to use this time to build your credit score and pay down credit card debt. This may make it easier for you to get a lower rate on a refinanced loan when the Covid-19 forbearance ends.

Is refinancing consolidated federal student loans a bad idea?

Refinancing federal student loans doesn’t make sense if you’ve had difficulty making the student loan payments due on your consolidation loan. Private lenders offer little help if your income drops. The best options many lenders offer are to temporarily pause payments with a deferment or forbearance or let you make interest-only payments for a brief period of time. But once that relief ends, you’ll have to make the payments the loan servicer is demanding. If not, you’ll risk defaulting. Refinancing a consolidated federal student loan also may be a bad idea if you’ve worked full-time for the government or nonprofit anytime after October 2007. You may lose eligibility to get retroactive credit for relief under the Public Service Loan ForgivenessPublic Service Loan Forgiveness (PSLF)A federal program that forgives the remaining balance on Direct Loans after 120 qualifying monthly payments made while working full-time for a government or qualifying nonprofit employer. Program. Read more about the PSLF limited waiver. The help the federal government is offering borrowers during the pandemic is unprecedented. And lawmakers continue to push for additional tweaks and overhauls to increase federal student loan borrowers’ relief, including the cancellation of $10,000 of student loan debt. While there’s no guarantee widespread loan cancelation will happen, If you refinance student loans, you’ll likely miss out on that benefit and others. Learn More:How to Lower Student Loan Payments

Consolidation and refinancing compared

Federal student loan consolidation combines your federal loans into a single loan made under the Direct Consolidation Loan program. This process won’t change your interest rate. Still, it could make you eligible for better repayment options and help qualify you for loan forgiveness programs. You’re eligible to consolidate even if you have a spotty credit history. Private student loan refinancing — also called private student loan consolidation — refers to paying off your existing federal or private student loans and getting a new private loan. You’ll need good credit or a cosigner to get the most competitive rates. You can also choose between paying a fixed or variable interest rateVariable Interest RateAn interest rate that can change over the life of a loan, usually based on a market index. Variable rates often start lower than fixed rates but can rise or fall over time.. Many lenders limit the amount they’re willing to refinance.

When should you refinance a student loan after consolidation?

Look to refinance your consolidation loan only after becoming comfortable with no longer qualifying for federal loan benefits. Student loan refinancing can offer you long-term savings, especially if you have high-fixed interest rateFixed Interest RateAn interest rate that stays the same for the life of a loan. Federal student loans carry fixed rates; some private student loans offer fixed or variable options. Parent PLUS Loans. Read more about Parent PLUS Loan repayment options. You’ll need good credit (ideally a FICO score in the 700s), stable income, and a low debt-to-income ratio to qualify for the best student loan refinancing repayment terms. You can also add a cosignerCosignerA person who signs a loan agreement alongside the primary borrower and becomes equally responsible for repayment. Cosigners are common on private student loans when the student has limited credit or income history. to strengthen your application. You can shop around using an online marketplace like credible.com. You’ll be able to compare rates and loan terms without a hard credit check. Once you find a few offers you like, submit loan applications to each lender within a short window. The multiple inquiries will be treated as one on your credit report. Learn More: How Does Student Loan Refinancing Affect Credit?

Bottom Line

Refinancing your current loan can help you save money in the long run, but it comes with some costs. The new loan will be a private student loanPrivate Student LoanA student loan issued by a bank, credit union, or other private lender rather than the federal government. Private loans generally lack federal protections like income-driven repayment and broad forgiveness programs., which means you won’t get the same benefits available to federal education loans. If you want to lower your monthly payments, explore all of the government’s repayment options on studentaid.gov. You may find that you can keep your loans federal and get a more affordable payment. After you do that, if you believe refinancing your consolidation loan is best for you, shop around with different lenders to find the best rates. But consider holding off on refinancing until the payment pause ends this August. UP NEXT: Who Do You Contact If You Have Questions About Student Loan Repayment Plans?