What is a Private Student Loan Consolidation?

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By Mark Kantrowitz

June 22, 2020

A private consolidation loan is the same as a private refinance. Private student loan consolidation yields a new loan that refinances student loans, replacing one or more student loans with a single new private student loan.

Should I Consolidate Private Student Loans?

Private student loan consolidation may be used to refinance federal student loans and private student loans. Borrowers should be careful about refinancing federal student loans into private student loans, however, since federal student loans have better benefits and are easier to repay than private student loans. Refinancing federal loans into a private loans means a loss in these benefits: income-driven repayment, generous deferments, subsidized loans, death and disability discharge, and potential to have federal student loans forgiven.

The term “consolidation” is more often used in connection with combining federal student loans into a single loan. The term “refinance” is more commonly used with private student loans.

Federal student loan consolidation is not like a private student loan refinance, since the interest rate is based on the interest rates on the old loans and not the borrower’s credit scores. However, private student loan lenders often use the terms consolidation and refinance as synonyms. Both consolidation and refinance combine multiple loans into a single loan.

Use our Student Loan Refinancing Calculator to estimate how much you could lower your total and monthly loan payments by refinancing your student loans.

Some of the key benefits of private student loan consolidation include:

  • Getting a new loan with a new interest rate. If your credit scores have improved, you may qualify for a lower interest rate.
  • Releasing a cosigner from their obligation to repay the cosigned loans. If you get a private consolidation loan without a cosigner, the new loan pays off the old loans, and the cosigner is no longer required to repay the debt. This will also reduce the cosigner’s debt-to-income ratio, making it easier for them to qualify for new credit cards, auto loans and mortgages.
  • Switching lenders. If you don’t like your lender, private student loan consolidation lets you switch to a different lender.
  • Changing the repayment term. A private consolidation loan is a new loan with a new repayment term. 
  • Reduce your loan payment. If a private refinance yields a longer repayment term, private student loan consolidation will yield a lower monthly student loan payment.
  • Save money on interest. If a private student loan consolidation yields a shorter repayment term or a lower interest rate, it may reduce the total interest paid over the life of the loan.
  • Simplifying repayment. Private student loan consolidation replaces two or more loans with one loan, making it easier to manage your student loans. 

This chart illustrates the differences between a federal consolidation loan and a private refinance.

Credible allows you to compare interest rates from several lenders at the same time. Splash Financial is a student loan refinance marketplace that matches you with a lender with a low interest rate.

Besides the best interest rate, you can also compare benefits of lenders, such as options if you lose your job. Some examples of student loan refinance benefits, include: 

  • LendKey offers an opportunity to put loans in forbearance during an economic hardship and has a refer a friend program, where you can earn cash for referrals.
  • Earnest offers forbearance options if you lose your job, get an income reduction, take parental leave or if you are experiencing high medical bills. Earnest also allows you to skip one payment per year, upon request.
  • SoFi offers a temporary forbearance if you lose your job. Plus, they have a referral program and offer personalized financial advice from credentialed financial advisors.
  • College Ave offers 16 different options for loan terms, ranging from 5 to 20 years.

The ChangEd app helps student loan borrowers pay down their debt faster. Link your credit and debit cards and with every purchase you make, the total is rounded up, and that “spare change” is added to your student loans. You can also earn points for potential free payments. Read our review to learn more.

At Savingforcollege.com, our goal is to help you make smart decisions about saving and paying for education. Some of the products featured in this article are from our partners, but this doesn’t influence our evaluations. Our opinions are our own.

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