Student loans may be a hot political topic right now, but for borrowers they’re part of everyday life, and probably not the best part. If you took advantage of student loan programs that were available while you were in college and graduated with debt, you might be overwhelmed with the thought of paying it off.
Even if the balance doesn’t seem insurmountable, you might be sent back with multiple bills from multiple lenders with different due dates and different amounts. That’s a lot to keep track of, especially when you thought you’d finally crossed math off your list after passing the pre-calculus.
Refinancing or consolidating your student loans can help you deal with 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 find out if either would improve your personal situation, you must first understand their definitions.
Defining 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, counseling and education programs at National Credit Counseling Foundation.
Federal loans are those issued directly by the Department of Education (this is how all federal student loans are granted today) or by a private lender and guaranteed by the government, which is how federal student loans were made before 2010. (Names associated with student loans no longer distributed include Stafford, Perkins and FFEL.) MORE ready are federal loans now given to parents and graduate or professional students.
That’s a lot to keep clear, 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 have 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 similar, however. 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 Does Student Loan Consolidation Differ From Refi Student Loan?
Despite the similarities between student loan consolidation and student loan refinancing, there are distinct differences.
- Only federal loans are eligible for student loan consolidation.
- Federal and private loans are 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 offers a variety of repayment plansand there’s one to suit almost every budget.
- Private lenders set the terms of a loan when it is made and are not as interested in the ups and downs of your financial situation.
- Private lenders do not offer income-based repayment options and will not “forgive” your loan balance simply 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 interest rate on your credit score.
What are the pros and cons 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, some of which are income-based and have terms of decades, combining federal loans with direct consolidation can lower your monthly payment. You will also benefit from a fixed interest rate for the duration of your loan. The downside is that by extending the term of your loan, you’ll make more payments, accrue 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 may lose some benefits from your old loans or you may have to start working again to get loan forgiveness.
Refinancing into a new private loan can provide benefits like 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 you lose all the protections offered by federal student loans, such as longer terms, income-based repayment plans, and the ability to defer or forbear if times get tough. More importantly, you no longer have access to loan forgiveness.
Should I consolidate or refinance my student loans?
Whether you should consolidate or refinance 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 the payments enough to actually repay your loans. In this case, with good credit, refinancing could work in your favor.
On the other hand, if your balance is staggering relative to your current and potential income, a federal student loan consolidation might offer more realistic payment options and 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.
“We see more and more people every year who owe more than $100,000,” he says. In this case, a loan consolidation with income-based repayment and the possibility of loan forgiveness might be more appropriate.
You can start a direct consolidation loan free online application. 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 best repayment option.
If you want to refinance your student loans, find a lender and apply as you would for other private loans. You can compare offers from many lenders and get help choosing the right one on websites such as student loan planner Where NerdWallet. And we promise you won’t have to revisit the pre-calculation to run some numbers. Student loan heroes has plenty of calculators to do the math for you.
Finally, remember that in addition to consolidating or refinancing multiple loans, you can consolidate or refinance a single loan for better terms, a lower interest rate, or cash back. And you can do it multiple times.
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Originally published: February 28, 2020