Your Student Loan and Consolidation: When to Refinance

The difference between your student loan and consolidation of student loans can mean money in your pocket through a lower monthly payment and the added convenience of keeping up with one payment instead of many. But not everyone qualifies for student loan consolidation so consider the following when deciding when to refinance.

When You Meet the Requirements

The federal student loan consolidation program allows you to combine both Direct and Federal Family Education Loans (FFEL) into one loan, sometimes with a lower monthly payment. Both Direct Loan and FFEL programs have consolidation options.

In both programs, the loans you want to consolidate must be in the grace period, deferment period or being repaid. If you have defaulted on a loan, you must either have gotten current on late payments or agreed to repay through the Income Contingent Repayment Plan.

For the Direct Loan program there is no minimum amount required to consolidate, but you must have at least one Direct Loan. Finally, FFEL loans, which are federally-backed loans offered through private lenders, such as banks, may have minimum loan balance requirements.

When Interest Rates Warrant It

The primary benefit of student loan consolidation is lower monthly payments through lower interest or extended payout.

Stafford and PLUS (Parent Loans for Undergraduate Students) loans are likely candidates for student loan consolidation. However, if you have fixed-rate loans, compare the fixed-rate you have with the new fixed rate you will receive in the federally-backed Direct and FFEL consolidated loans. Make sure your new rate and new payment make sense.

In most cases, you will not want to include Perkins Loans in your consolidation because they will lose their federal subsidies, likely making them more expensive after refinancing.

When Extended Payout Warrants It

Most federally-backed student loans have a 10-year payout. After you complete school or are no longer a full-time student, you have a six-month grace period before payments begin. 

With Direct Student Consolidation Loans, you have four repayment plan options.

  • Standard - A monthly payment of at least $50 for 10 to 30 years contingent on total student loan debt.

  • Graduate - Minimum payments equal at least to monthly interest on the loan with the monthly payment increasing every two years. A 10- to 30-year payout. All factors contingent on total student loan debt.

  • Extended - For those with more than $30,000 in student loan debt, a payout period of up to 25 years.

Income Contingent - A 25-year payout term with monthly payments based on your income.

When Your Credit Warrants It

There also are private alternatives. You can consolidate federal student loans through private lenders by borrowing and prepaying your federal student loans, leaving you one loan with a bank or credit union. If economic condition have lowered interest rates and you leave college with a strong credit score you can negotiate competitive rates privately.

Consolidation Roadblocks

You cannot include a student loan in consolidation if there is a legal judgment against you for that loan. Parents and students cannot combine loans into one consolidation. You cannot combine federal loans with non-federally-backed loans from private institutions in a federal loan consolidation.

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