Private student loan consolidation or “refinancing” involves repaying older student loans by taking out a new loan from a private lender to replace them.

The main benefits to refinancing student loans can include the following.

  • Eliminating the need to make multiple payments to various lenders each month. (Instead, there is just one monthly payment that must be made.)
  • Switching from a variable interest rate to a fixed interest rate (or vice versa, depending on the situation).
  • Getting a lower interest rate.

Some private lenders will include federal student loans in a private refinance. Other private lenders refinance only private student loans. (“Federal” student loans are loans that are made or guaranteed by the U.S. Department of Education.)

There are several reasons to keep federal and private student loans separate. By refinancing federal student loans into a private loan, this can cause the loss of eligibility for deferment, forbearance, forgiveness, and cancellation options, as well as eligibility for affordable repayment plans based on income, which may be available under the federal loans.

Some private lenders offer certain forms of relief to borrowers who are struggling to make their student loan payments (such as forbearance plans, repayment assistance, and other relief), but these options are available at the sole discretion of the lender. Not all lenders offer assistance.

Determining Whether You Have Private or Federal Student Loans 

If you don’t know whether your student loans are private or federal:

  • check the National Student Loan Data System at https://www.nslds.ed.gov (which tracks all federal student loans), and/or
  • review your credit reports, which should list any student loans that you have.

Eligibility Requirements for Private Student Loan Refinancing

Each private lender has different criteria. Most lenders require the borrower to be a citizen of the United States (or a legal resident), and to meet certain credit, employment, education, and income requirements.

Private lenders also usually require that borrowers have a certain minimum amount of student loan debt (say, $10,000) in order to refinance.

How the Interest Rate Is Determined

A private lender will determine the interest rate primarily by looking at your credit score. (This is different from federal student loans, where the interest rate is the same for every borrower and a credit check is usually not required.) The lender may also review your employment background, your cosigner’s (if there is one) financial history, and your history of meeting financial obligations, among other things. The lender will evaluate how risky it would be to offer you a loan, and then set the rate accordingly. 

Repayment and Fees

Once the student loans being combined are refinanced, the repayment period begins. (During the refinance process, borrowers must continue to make regular payments on the loans being refinanced.) Private lenders sometimes charge various fees (such as an application fee, an origination fee, or an early-repayment fee) for student loan refinancing.

Some Advantages to Private Student Loan Refinancing

  • Getting a lower interest rate. When borrowers initially get private student loans, they are generally treated as higher credit risks by lenders due to their limited credit history. This means that the interest rates associated with the original student loans are usually pretty high. Borrowers who have obtained a degree, found a job, and have established excellent credit since initially taking out their student loans might be able refinance with a new private loan at a lower interest rate.
  • Getting a single monthly payment. Refinancing student loans into one new loan can make repaying the debts simpler because the borrower only needs to make one payment per month to one lender, rather than multiple payments to multiple lenders. 
  • Switching to a variable or fixed interest rate, whichever is more suitable. Depending on your situation, you may want to switch from a variable to a fixed interest rate, or from a fixed to a variable rate. Borrowers that switch from a variable rate to a fixed rate get a predicable payment amount and don’t have to worry about the monthly payments going up. Borrowers who switch from a fixed rate to a variable rate can typically get a lower rate (at least until the interest rate adjusts upward), which means that if they pay off the loans in relatively quick time period, they can save money by paying less interest overall.

Some Drawbacks to Private Student Loan Refinancing

  • Loss of certain benefits associated with federal student loans. Those with federal student loans will probably give up certain benefits by refinancing with a private lender. Federal student loans offer benefits including deferment, forgiveness, cancellation, and forbearance opportunities, as well as repayment plans based on income. By refinancing federal loans with a new private student loan, you’ll lose eligibility for federal programs.
  • Loss of certain benefits for active duty servicemembers. Active duty military servicemembers are eligible to have their interest rate reduced to 6% on student loans (federal and private) that were taken out before military service. By refinancing your loans while you’re serving in the military, you will lose eligibility for this benefit.

Options If You Can’t Keep Up With Loan Payments

Some private lenders offer assistance to borrowers who are having difficulty repaying their refinanced loans. In some cases, you might be able to get:

  • a deferment or forbearance (if either option is available from the private lender)
  • an alternate payment plan (such as a graduated repayment plan or an extended repayment plan), or
  • an interest rate reduction, if you ask for it and the lender agrees.

How to Get More Information or File a Complaint 

The Consumer Financial Protection Bureau (www.consumerfinance.gov) provides information about student loan refinancing and has a complaint system to help borrowers who are having trouble with their private student loans (www.consumerfinance.gov/complaint/#student-loan).

Private Student Loan Consolidation (Refinancing)

Overview

Private (non-federal) student loan consolidation is usually called “refinancing.”

Refinancing is the act of paying off various student loans with an entirely new loan from a private lender. It is also possible to refinance a single student loan.

The main reasons that most borrowers refinance their student loans are:

  • to get a lower interest rate
  • to lower the monthly payments by extending the repayment term
  • to switch from a variable to a fixed interest rate (or the other way around), and/or
  • to simplify debt management by combining several loans into one so that there is only a single payment per month.

A number of private lenders only refinance private student loans. (This means they won’t include any federal student loans in the refinance.) However, there are a few lenders that will refinance both private and federal student loans into one new private loan – though there are several reasons to think twice before doing this.

For example, refinancing federal and private loans together can cause the loss of benefits associated with federal loans, such as eligibility for deferment, forbearance, forgiveness, and cancellation options, as well as the loss of the option to get an affordable repayment plans based on income.

Certain private lenders (not all) offer forbearance plans, repayment assistance, and other forms of relief. However, these private options may not be as helpful as the options offered under federal loan programs. 

Private student loans are any type of student loan that is not made or guaranteed by the U.S. Department of Education. Private student loans come from all sorts of sources, such as banks, credit unions, schools, and other types of lenders.

Private student loans don’t usually have as favorable of terms as federal student loans. Also, private loans typically require a credit check and may have stricter eligibility requirements than federal student loans. In addition, because the government is not involved with private student loans, the rates and other terms are not regulated in the same way that federal student loans are regulated.

For these reasons, private student loans can be more expensive than federal student loans.

How To Figure Out if Your Student Loans Are Private or Federal

To figure out if your student loans are private or federal:

  • Check the National Student Loan Data System (NSLDS) at https://www.nslds.ed.gov, which is the Department of Education’s central database for student aid. All federal student loans are tracked in this system. If you have a student loan, but it’s not in the NSLDS system, your loan is private. (There is no similar central system to check for private student loans.)
  • Check your credit reports, which should list any student loans

Eligibility Requirements for Private Student Loan Refinancing

Because student loan refinancing is done through private lenders, eligibility requirements vary from lender to lender.

In general, to be eligible for a private student loan refinance, most lenders require the borrower to:

  • be a U.S. citizen, U.S. national, or a permanent resident
  • meet the lender’s credit, employment, and debt-to-income requirements
  • have a certain minimum amount of student loan debt to be refinanced (for example $5,000 or $10,000), and
  • have graduated from (or be enrolled at) an eligible school.

Basically, all private lenders want proof of the following.

  • That the borrower has a job (or an offer of employment) with an income that is sufficient to cover the student loan payments and all other expenses – the higher the income, the better.
  • That the borrower has a good credit score and a reliable payment history on other debts. (For those with a poor credit score or lack of credit history, some lenders may also look at other factors such as education, employment history, and degree, for example. Private lenders want to be sure that they’re lending money to borrowers who are a safe bet, meaning they won’t default on the loan. For example, those with degrees in lucrative fields like medicine, law, engineering, or finance are likely to be seen as a safe bet in the eyes of a private lender.)

Some refinancing lenders may also require a cosigner who is credit worthy.

Details About Private Student Loan Refinancing

Interest Rate

The interest rate on a private refinance loan is ordinarily based on creditworthiness, with your credit score being the main factor. This means that if your score has gone up since you first obtained your private student loans, you might be able to get a lower rate by refinancing with a private lender.

While a large number of lenders look at credit scores as the determining factor when assigning an interest rate, some lenders will also consider additional things. For example, the lender may review your career experience, education, monthly debt-to-income ratios, and history of meeting financial obligations when determining the rate.

Repayment

The repayment period on a student loan refinance begins immediately after the loans being combined are refinanced. (It’s important to continue to make payments on the individual student loans being refinanced until the process is complete.)

Repayment plans and options on refinancing loans are not the same from lender to lender. The repayment plan will depend entirely on what the lender offers. And, unlike with federal student loans, private lenders don’t usually offer repayment plans based on income.

Fees

A private lender may charge fees (for example, application, origination, or early-repayment fees) for student loan refinancing, though not all do.

Upsides to Private Student Loan Refinancing

  • Refinancing can reduce the interest rate. Those with an excellent credit history (especially those with a steady income) may be able to get a significantly lower interest rate through a refinance. By reducing the interest rate, the cost savings over the life of the loan be significant – potentially thousands of dollars.
  • Also, for those who are currently struggling to pay the minimum amount due on their student loans, refinancing to get a lower rate might be able to offer some relief because the total monthly payment amount will be less than the total amount paid on the loans previously.
  • It’s simpler to keep track of the payments after a refinance. If you have multiple loans with many different lenders and have a tough time keeping tabs on when your payments are due, refinancing your student loans can make repaying the debts simpler. After refinancing, there’s only one payment required per month, which is paid to one lender.
  • It’s possible to switch from a variable interest rate to a fixed interest rate (or from a fixed rate to a variable rate). With a variable interest rate, the monthly payment can fluctuate. For some people, it is stressful not knowing how much they’ll owe from month to month. With a fixed interest rate, the payments stay the same over the life of the loan, so there is no reason to be concerned about payment increases.
  • On the other hand, those who think they can pay off the loans in a short period of time (say, five years) may want to choose a variable rate, which will likely have a lower rate at the beginning. If the loan is paid off before the rate adjusts upward, there will be a substantial savings when it comes to overall interest paid. (A variable rate loan might also be a good option for borrowers who think they’ll earn enough income in the future to cover higher payments if interest rates go up.)

Downsides to Private Student Loan Refinancing

  • Refinancing resets the loan term. The loan term (that is, how long it takes to repay the loan) resets (starts over) at refinancing. So, even though the payments are likely to be lower, refinancing could potentially increase the total interest paid over the life of the loan and the overall cost of the loan will go up (unless there was a significant reduction in the interest rate due to the refinance).
  • There could be a loss of benefits for active duty military servicemembers. Active duty military servicemembers are eligible to have the interest rate on their student loans (federal and private) that were taken out before military service lowered to 6%. Refinancing during service takes away eligibility for this reduction.
  • There could be a loss of benefits by consolidating private student loans with federal student loans. Private student loan refinances do not have all of the benefits of a federal Direct Consolidation Loan (see below), including deferment, forgiveness, forbearance, and affordable repayment plans based on how much you earn.

Deferment vs. Forbearance

Both deferment and forbearance provide a temporary relief from student loan payments.

A federal student loan deferment is a period of time when payments are not required. (Basically, the loan payments are put on hold.) Interest does not accrue on subsidized loans, but unsubsidized loans continue to accrue interest while in deferment.

With a federal student loan forbearance, the payment is temporarily reduced or not required, but interest continues to accrue.

Consolidating Federal Student Loans With Private Student Loans

Private student loans cannot be consolidated with federal student loans under the government’s Direct Consolidation Loan program.

How Direct Consolidation Loans Work

With a federal Direct Consolidation Loan, the interest rates of the loans being consolidated are averaged and rounded up to the nearest 1/8th of one percent. Most federal student loans can be consolidated under this program. The Direct Consolidation Loan program offers certain benefits, like income-based repayment plans, forgiveness, forbearance, and deferment. 

While it is possible to refinance private student loans together with federal student loans through some private lenders, doing so means losing the protections associated with federal student loans including:

  • plans that allow you to modify your payment to match your income (such as the Pay As You Earn Plan, the Income-Based Repayment Plan, and the Income-Contingent Repayment Plan)
  • pubic service loan forgiveness and teacher forgiveness programs
  • other forgiveness options (such as forgiveness under an income-driven repayment plan if you make payments for a full 20 to 25 years, depending on the plan)
  • loan cancellation and discharge programs
  • forbearance, and
  • deferment (up to three years worth), among other things.

These benefits won’t transfer over to a private loan.

It’s generally unwise to refinance federal student loans into a private loan if you are at all worried about the stability of your income or you work in public service.

Note: One thing to keep in mind is that consolidating federal student loans through the Direct Consolidation Loan program could also potentially lead to the loss of certain benefits, such as a reduced interest rate or certain repayment incentives that are offered under the loans being consolidated. For example, by consolidating a federal Perkins Loan into a Direct Consolidation Loan, certain cancellation benefits that are only available in that program are lost. It’s important to check existing benefits, and whether they will be lost, before you consolidate or refinance federal student loans.

Still, there are a few circumstances when it might be beneficial to refinance federal student loans into a private loan. For example:

  • The federal student loans have high interest rates. Depending on loan type and disbursement date, some federal student loans could have higher interest rates than a refinancing loan offered by a private lender. For those who receive a consistent income working for a private company (and can get a lower interest rate with a private lender), refinancing may offer the best way to pay the least amount of money over the life of the loan.
  • You don’t qualify for the federal student loan benefits that are available under your loans. As noted earlier, federal student loans offer benefits and protections that do not transfer over to private lenders.
  • However, if the available federal benefits do not apply to your particular situation, you might not be giving up much by refinancing through a private lender. For example, under the Public Service Loan Forgiveness Program, the balance of a federal Direct Loan can be forgiven after 120 qualifying payments if you’ve worked full-time in public service, such as for a government organization or a not-for-profit organization. This benefit won’t help those who don’t work in public service.
  • Also, some private lenders offer their own benefits, such as job-loss protections. One student loan refinancing company, for example, offers a program that provides forbearance combined with job search support to those borrowers who lose their jobs through no fault of their own. (The downside is that interest continues to accrue during the forbearance period and will be added to the principal balance of the loan. Also, keep in mind that private forbearance and deferment options may not be as generous as the federal options.)
  • Another private lender offers borrowers the ability to skip a payment every 12 months after making six months of on-time payments. (The downside to this is that the principal and interest from that payment is spread out over the remaining payments, which results in increased monthly payments.)

Options If You Can’t Make Your Private Refinance Loan Payments

Forbearance and Deferment

It’s possible to avoid defaulting on your refinance loan by placing it in deferment or forbearance – if either of those options is available from the private lender.

Private lenders sometimes offer options to borrowers who are having trouble keeping up with student loan payments, like the ability to defer payments or forbearance in cases of financial hardship or disability. For example, a lender might allow a short-term forbearance (say, three months for up to twelve months total over the life of the loan) if you lose your job or can provide proof that you’ll be able to repay the debt in the future.

Note: Interest will continue to accrue during periods of deferment for most private student loans, unlike some federal student loans.

These types of benefits are at the discretion of the lender.

Alternate Repayment Plans

Some private lenders offer alternate payment programs to lower the monthly payment for borrowers having trouble keeping current on the loan. A few examples of these types of plans include:

  • a graduated repayment plan (where the amounts start out low and gradually increase over time)
  • an extended repayment plan (where the term of the loan is extended so that the monthly payment is less, but the loan is paid off over a longer period of time).

Requesting An Interest Rate Reduction

Another way to obtain payment relief on a private student refinance loan is to request an interest rate reduction. In some cases, the current lender may agree to reduce the interest on the loan (temporarily or permanently), if you can’t keep up with payments or if you agree to enroll in automatic payments.

Not All Lenders Offer Assistance

Not every private student loan company offers assistance to borrowers who are having difficulty repaying their loans.

Because policies vary from lender to lender, it’s usually a good idea to learn what options will be available – before refinancing with a particular lender – just in case the payments eventually become unaffordable.

If you are struggling to make the payments after refinancing your student loans, contact the loan servicer to get information about deferment, forbearance, or other relief options.

Some Employers Offer Student Loan Refinancing and Other Relief 

Some employers offer student loan assistance programs. For example:

• One employer has an arrangement with online lender to offer a 0.25% interest rate reduction to U.S. employees that refinance their student loans. (For example, this means that a graduate with student loans at 7% interest could potentially refinance at a 3% interest rate and would then be eligible for another 0.25% off the interest rate.)

• Another firm has a program where some junior employees are eligible to receive $1,200 a year for up to six years toward their student loans. The benefit is paid directly to the loan servicer of certified student loans, and counts as income for employees.

A number of other companies are rolling out similar programs. Check with your employer to see if it offers any assistance to employees with student loan debt.

Where to Learn More About Private Student Loan Refinancing

The Consumer Financial Protection Bureau (CFPB) (www.consumerfinance.gov) provides information about student loan refinancing, along with general information about student loans and how to repay them.

Also, the CFPB has a system that allows student loan borrowers to submit a complaint about their lender or servicer. The CFPB will forward the complaint to the lender or servicer, and then work to get a response from that company. Go to www.consumerfinance.gov/complaint/#student-loan to make a complaint.