Student loans may be a trending political topic right now, but for borrowers, they are a part of everyday life, and probably not the best part. If you took advantage of the student loans available while in college and graduated with debt, you might be overwhelmed by the thought of paying them off.
Even if the balance does not seem insurmountable to you, you could be made redundant with several invoices from several lenders with different due dates and different amounts. That’s a lot to follow, especially when you thought you finally crossed math off your list after you passed the pre-calculus.
Refinancing or consolidating your student loans can help you do everything from huge balances to scattered payment deadlines. However, even though these terms are sometimes used interchangeably, they have distinct meanings and different advantages and disadvantages. To know whether either of them would improve your individual situation, you must first understand their definitions.
Define student loan consolidation and student loan refinancing
Student loan consolidation refers to the combination – or consolidation – of several federal according to Barry S. Coleman, vice president of counseling and education programs at National Foundation for Credit Counseling.
Federal loans are those that were either issued directly by the Department of Education (this is how all federal student loans are made today) or by a private lender and guaranteed by the government, this is so than federal student loans have been made before 2010. (Names associated with student loans that are no longer distributed include Stafford, Perkins, and FFEL.) PLUS loans are federal loans now given to parents and graduate or professional students.
That’s a lot to keep straight, but the important thing to know is that these are all federal student loans, so they can all be incorporated into a Federal Direct Consolidation Loan. In fact, most federal student loans – and only federal student loans – are eligible for consolidation. Today, consolidated loans carry a fixed interest rate determined by averaging the rate of the included loans.
Unlike federal student loan consolidation, refinance student loans requires a private lender. The general idea is, however, similar. You can combine your existing student loans into one private loan. And in this case, you can include both federal student loans and private student loans.
How is student loan consolidation different from student loan refi?
Despite the similarities between student loan consolidation and student loan refinancing, there are some distinct differences.
- Only federal loans are eligible for the student loan consolidation.
- Federal and private loans are both eligible for refinancing.
- You can also opt for both methods if you want to consolidate your federal loans and refinance private loans.
- The Federal Government Direct Consolidation Loan provides a variety of repayment plans, and there’s one for every budget.
- Private lenders set the terms of a loan when it is made and are not as interested in the vagaries of your financial situation.
- Private lenders do not offer income-tested repayment options and will not “forgive” your loan balance just because you have made many years of on-time payments.
- A private student loan refinance may result in a lower interest rate because private loan offers are determined in part by your credit score.
- The Department of Education does not base your student loan consolidation or your interest rate on your credit score.
What are the advantages and disadvantages of each?
Consolidation and refinancing can make your life easier by allowing you to make one student loan payment each month. Since consolidation offers a variety of repayment options, including some income-based and having terms of several decades, combining federal loans with direct consolidation can lower your monthly payment. You will also be able to get a fixed interest rate for the term of your loan. The downside is that by extending the term of your loan, you’ll make more payments, earn more interest, and pay more in the long run.
Consolidation starts a new loan and also restarts the clock on repayment plans with a specific duration. You might lose some of the benefits of your old loans, or you might have to start working again to get a loan forgiveness.
Refinancing into a new private loan can offer benefits such as a lower interest rate and shorter term that will help you pay off your new loan faster. And private loans also give you access to variable and fixed rates; some lenders might even offer cash back for refinancing, depending on Student loan planner.
However, once you transfer federal student loans to a private lender, you cannot withdraw them. This means that you lose all the protections offered by federal student loans, like longer terms, income-oriented repayment plans and the possibility of deferral or abstention if times get tough. More importantly, you no longer have access to the loan forgiveness.
Should I consolidate or refinance my student loans?
Consolidating or refinancing your student loans depends on your situation and your goals. Compare your total student loan balance with your current income to see if you’ll be able to manage payments at a level that actually pays off your loans. In this case, with good credit, refinancing could work in your favor.
On the other hand, if your balance is huge relative to your current and potential income, a federal student loan consolidation could offer more realistic payment options and a final loan forgiveness.
Travis Hornsby, founder of Student loan planner, explains that if your debt is less than $ 50,000, you can probably refinance and pay off the loans. However, borrowers with more debt may benefit more from federal consolidation and income-oriented repayment plans.
“Every year we see more and more people owing more than $ 100,000,” he says. In this case, a loan consolidation with income-based repayment and the possibility of a loan forgiveness might be better suited.
You can start a direct consolidation loan online application for free. Your student loan officer may or may not suggest it, although it’s in your best interest, so do your own research to make sure it’s the most beneficial repayment option.
If you want to refinance your student loans, find a lender and apply as you would other private loans. You can compare the offers of many lenders and get help choosing the right one from sites like Student loan planner or Nerdwallet. And we promise you won’t have to revisit the pre-calculus to run some numbers. Student loan hero has lots of calculators to do the math for you.
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