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Consolidation vs. Refinancing Student Loans: Which Is Right for You?

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There are two main ways that borrowers who have federal student loans can try to lower their monthly payments or make them more manageable. These two paths are typically either consolidating student loans and switching to an income-driven repayment plan or refinancing and consolidating student loans with a private lender.

Although the two options might seem similar and many people use them interchangeably, there are actually distinct differences between them. These differences will affect which one might be best for your specific situation.

Typically, borrowers consider consolidation and refinancing when they want to pay off their student loans more quickly, or they want to make the payments easier. Either of these options can help, but you may find one option is better than the other.

Here’s more information about each option:

What Does Consolidation Mean?

When you consolidate your federal student loans, you are essentially taking all of your student loans and combining them to make one bigger loan. This means that you are rolling your student loans into one monthly payment.

One way you can do this is through a Direct Consolidation Loan. If you have multiple student loans, the government will combine them to form one new loan. The interest rate will be the weighted average of all your old loans.

You can also consolidate and/or refinance federal and private student loans with a new private loan consolidation. In this case, you’ll apply for a new private loan that consolidates your old loans into one new loan. Typically, when this happens borrowers also refinance student loans simultaneously and receive a lower interest rate.

When Does It Make Sense to Consolidate Student Loans?

You should consolidate your loans if:

  • For simplicity, you want to make only one monthly student loan payment, or because you have trouble tracking multiple loans and due dates.
  • You are in danger of defaulting on your student loans and have not consolidated before. When you are in danger of default, consolidating your loans and enrolling in an income-based repayment plan can help make your payments more manageable.
  • You want to lower your monthly payments, even if it means it will take longer to pay off your student loans.
  • You have done the research to find out whether or not you will lose some of the original benefits of your current student loans. For example, if you consolidate into a private loan, you might be ineligible for some of the income-driven plans available through the federal government.
  • You have variable rate loans that you want to transfer to a fixed-rate loan.
  • You understand that, once you consolidate your loans, you cannot go back and un-consolidate them. They essentially form a new loan, paying off your old ones in the process.

I took the route of consolidating my student loans back when I graduated in 2009, and I have been happy with the results. I had four or five different student loans, and the consolidation loan took all those loans and combined them into one. This has helped me stay more organized and has made paying off my student loans easier.

What Does Refinancing Mean?

Refinancing your student loans typically means working with a private lender who will essentially offer you a new loan at a lower interest rate. Typically done in combination with consolidation, you will be taking your student loans and rolling them into a new one. The private lender will pay off your federal loans, and afterwards, you will owe the private lender money and not the federal government.

When Does It Make Sense to Refinance Student Loans?

You should consider refinancing your student loans if:

  • You have a solid job and are confident you can make your student loan payments each month. Typically, private loans are not as flexible as federal loans and do not have as many hardship options when it comes to repayment and forbearance.
  • You have a high interest rate on your loans, and you want to lower it with a new loan at a lower interest rate.
  • You want to reduce the amount of time it will take to pay back your student loans, even if it means paying more each month.
  • You want to reduce the amount of money you spend in interest over the life of your loan and you know that a refinance and consolidation loan will help you do that.
  • You have a strong credit history and will be offered a competitive rate.

Finding What’s Best for You

Deciding whether or not consolidation and refinancing is right for you really comes down to how high your student loan balance is, how many student loans you have, whether or not you’re currently having trouble paying your student loan bills, and how high your interest rate is (if your interest rate is very low, it might not make sense to refinance at all).

Ultimately, as long as you do your research and know your options, you should be able to find a solution that works for you.

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Published in Direct Loan Consolidation, Federal Student Loan Refinancing, Private Student Loan Consolidation, Private Student Loan Refinancing, Student Loan Consolidation