Although student loans are a hot political topic at the moment, for borrowers they are just a part of life—and certainly not the best part. If you borrowed money from student loan programs that were available when you were a student and graduated from college in debt, you might feel too overwhelmed to deal with the burden. You can receive many bills from various lenders with various due dates and various amounts, even if the balance does not appear insurmountable. That's a lot to remember, especially after passing pre-calculus and believing that math was finally out of the way. Consolidating or refinancing your student loans may be able to help you deal with everything from astronomical sums to dispersed payment due dates. Although these terms are occasionally used synonymously, they have unique meanings as well as various advantages and disadvantages. You must first comprehend their meanings in order to determine which would be better for your particular case.
Definitions of Student Loan Consolidation and Refinancing
According to Barry S. Coleman, vice president for counseling and education programs at the National Foundation for Credit Counseling, student loan consolidation refers to integrating or consolidating various federal student loans under one servicer so that you have a single payment. Federal loans are those that were either made by a commercial lender and insured by the government, which is how federal student loans were made before to 2010, or by the Department of Education directly. Parents and graduate or professional students can now receive PLUS loans from the federal government.
There are many details to remember, but the most crucial one is that these loans are all federal student loans and can thus all be consolidated into a single federal direct consolidation loan. Actually, only federal student loans can be consolidated; the majority of them are not. Today, the interest rate on aggregated loans is fixed and is calculated by averaging the interest rates on the loans involved. Contrary to government student debt consolidation, refinancing student loans necessitates a private lender. However, the fundamental idea is the same. Your current student debts can be combined into a single private loan. Federal student loans, as well as private student loans, are both acceptable in this situation.
How Are They Different From Each Other?
There are some clear variations between consolidating and refinancing student loans despite their similarities.
- Only federal loans are eligible for student loan consolidation.
- Both federal and private loans qualify for refinancing.
- You can also opt for both methods if you want to consolidate your federal loans and refinance private loans.
- Direct consolidation loan from the federal government offers a variety of repayment plans, and there is one to suit just about any 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-driven 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 can bring with it 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.
The Pros and Cons
Both consolidation and refinancing provide you the option of making just one monthly student loan payment, which can make your life easier. Combining federal loans with a direct consolidation can lower your monthly payment because consolidation offers a number of repayment alternatives, some of which are income-based and have decades-long periods. For the duration of your loan, you will also be able to acquire an interest rate that is fixed. The disadvantage is that you will make more payments, accrue more interest, and ultimately pay more if you extend the duration of the loan. Restarting the clock on repayment plans with a set period also occurs when a loan is consolidated into an existing one. You could have to restart your efforts to work toward loan forgiveness or you might lose some perks that your prior loans provided.
A new private loan that you refinance into may have advantages like a cheaper interest rate and a shorter term that will enable you to pay off your new loan more quickly. Additionally, private loans provide you access to both variable and fixed rates; Student Loan Planner even mentions that certain lenders can give cash back for refinancing. The federal student loans you transfer to a private lender, however, cannot be transferred back. That implies that you forfeit all the benefits that federal student loan protections include, such as longer terms, income-driven repayment plans, and the potential for deferment or forbearance in case of hardship. Most significantly, you can no longer apply for loan forgiveness.
Which One Should I Choose?
Your situation and aspirations will determine whether you should consolidate or refinance your student loans. To determine whether you will be able to manage payments at a level to truly pay off your debts, compare your whole student loan balance with your present income. In that situation, refinancing can be advantageous for you if you have good credit. On the other hand, a federal student debt consolidation could offer more practical payment options and a final loan forgiveness if your balance is overwhelming in comparison to your current and projected income. According to Travis Hornsby, the creator of Student Loan Planner, you may probably refinance and pay off your debt if it is less than $50,000.
However, federal consolidation and income-driven repayment plans might be more advantageous for debtors with higher debt loads. Every year, he claims, "we see more and more folks who owe over $100,000." A loan consolidation with income-based repayment and the potential for loan forgiveness would be a preferable option in such situation. Online, you can start a free application for a straight consolidation loan. Even if it is in your best interest, your student loan servicer may or may not advise it, so you should conduct your own research to make certain it is the best repayment alternative.
Find a lender and submit an application exactly as you would for any other private loan if you want to refinance your student loans. On websites like Student Loan Planner or NerdWallet, you may evaluate the offers from several lenders and get assistance in making the best choice. And we guarantee you won't need to use pre-calc again to conduct some calculations. There are many calculators on Student Loan Hero that can perform the calculations for you. Last but not least, keep in mind that you can consolidate or refinance a single loan to obtain better terms, a cheaper interest rate, or a cashback benefit in addition to consolidating or refinancing several loans. And you can repeat this several times.