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Student loan consolidation vs refinancing


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When discussing student loan consolidation versus refinancing, either one may be a good option for you, provided you understand their differences.

  • Consolidation is best as a strategic move. It consolidates several federal loans into one new federal loan to allow you to make a single payment or qualify for government programs.

  • Refinancing a student loan is best to save money. It replaces one or more existing federal or private loans with a new private student loan, ideally with a lower interest rate.

There are many reasons why you should or should not consolidate or refinance student loans. Here’s what you need to know about each option, and how to decide if one is right for you.

Consolidation and refinancing are different

You may have heard the words “consolidation” and “refinance” used interchangeably, but they’re actually two separate repayment options.

Here is a breakdown of some key differences between consolidation and refinancing:

Student loan consolidation

Combines multiple federal loans into one federal loan.

Combines private and / or federal loans into one private loan.

What loans can I accumulate?

Private and / or federal loans.

No. Consolidation can reduce your payments by extending the term of the loan, but your interest amount will increase.

Can I access federal loan protections, repayment options and rebate programs?

Will I pay only one monthly bill?

Federal consolidation vs private consolidation

Federal loan consolidation is a government process. Private consolidation, or student loan refinancing, goes through private lenders.

To obtain a federal student loan consolidation, apply on the Federal student aid website. Only federal student loans are eligible for this option, and you are eligible for this option if you qualify.

Private loan consolidation requires the approval of a lender. Potential lenders will assess your eligibility and offer you a new loan with terms based on factors such as your credit history and debt-to-income ratio.

Estimate how much refinancing could save you

When to consolidate instead of refinancing

Consolidation has its advantages and disadvantages. The biggest advantage of consolidation over refinancing is that it retains the benefits of federal loans. But consolidation may also be the best option in these cases:

  • You juggle multiple federal loans. If you’ve taken out federal loans for more than a year in school, you may be faced with multiple loan payments, interest rates, terms, and services. Federal consolidation would give you a monthly bill to manage.

  • You are not eligible for a federal program. Most income-oriented repayment plans and loan cancellation programs are for federal direct loans. If you have a Federal Family Education Loan Program loan, you can upgrade to a Direct Consolidation Loan to access these options.

  • You want a new federal loan manager. The government will assign a company to service your federal student loans. If you don’t like the customer service it provides, you can change student loan manager by consolidating your federal loans.

When to refinance instead of consolidating

You already have private student loans. Most private lenders refinance federal and private loans. Federal loan refinancing requires caution as you will lose out on benefits such as income-oriented schemes and loan cancellation programs. Private loans do not offer these options, which makes private loan consolidation a no-brainer if you can get a lower rate.

Looking to save money. Bundling federal loans will not lower your interest rate. You will receive the weighted average rates on the loans you consolidate. Private lenders will offer you an interest rate based on your financial profile. This could decrease your monthly payments and the amount you repay overall.

You want to change the owner of the loan. There is no way to change who is responsible for paying off a federal loan. For example, you cannot consolidate your undergraduate loans with the PLUS loans your parents have taken out for you. Refinancing would allow you to take back these loans. It could also remove a co-signer from existing private loans.