You’ve already consolidated your loans but now you’d like to refinance to get a lower interest rate. The question is, can you? Or, does consolidating mean that you’re no longer able to shop for better terms and conditions that could save you money?
According to Devin Hughes at our partner LendKey, the answer is yes. It turns out that refinancing a consolidated loan isn’t any more complicated than refinancing any other type of debt. He also offered some helpful food for thought to consider if you’re thinking about refinancing.
Here's what Hughes told us:
When you refinance a student loan, or any loan for that matter, you take out a new loan to pay off an existing loan or multiple loans. The question then becomes, does it make sense to do so?
First, what is the difference between consolidating and refinancing. The terms are often used interchangeably but are indeed different. Refinancing a loan is typically done to get a lower interest rate or extend the time to repay the loan, lowering the monthly payment.
Consolidation is the process of paying off multiple loans and bundling them into one new loan. Depending on how you are consolidating makes a big difference in why you would want to consolidate your student loans.
Federal student loan consolidation is typically done to simplify your payments. The interest rate is calculated using the weighted average of the loans that are being consolidated. That means you will not save money but you will keep any benefits that those federal loans offer.
Private student loan consolidation with a private lender allows you the opportunity to reduce the amount you must pay over time. Your credit situation has likely changed since you took out the loans in college. Has your credit improved? There is a good chance you are a candidate to get a lower interest rate. Many credit unions, which are not-for-profit, offer refinancing options that can save you $1,000s on your student loans.
Be sure to understand any protections you may lose if you include federal student loans in your consolidation. Consolidating in this manner would also be considered refinancing because you are bundling the loans for a new interest rate.
Why would you want to refinance your student loans?
The answer is easy: think of the four S’s.
- Simplify – One payment, less confusing.
- Shorten – Refinance to a shorter term to pay off debt faster.
- Stretch – Stretch out the term, typically to lower your monthly payment.
- Save – Take advantage of lower rates to lower your monthly and/or overall payment.
Refinancing student loans to save money is usually the primary reason, with the others being an added benefit.