What is consolidation vs. Student loan refinancing?

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When it comes to student loans, this is one of the biggest choices.

Should I refinance my student loans? Do I have to consolidate my student loans?

The decision is important and could save you tens of thousands of dollars.

Here’s what you need to know and how to achieve it.

Student loan consolidation: the basics

According to Make Lemonade, the latest statistics on student loans show that there are over 44 million borrowers who collectively owe $ 1.5 trillion in student debt.

 

So now is the time to act.

When it comes to consolidating student loans, you have two choices:

  • Federal Consolidation of Student Loans: Direct consolidation loan through the federal government, or
  • Consolidation of private student loans: Refinance student loans with a private lender

While each strategy has merit, they approach student loan consolidation differently. Here are the main differences between federal student loan consolidation and student loan refinancing.

Loans eligible for student loan consolidation

1. Consolidation of student loans with the federal government

Federal student loans are the only student loans eligible for direct loan consolidation. This includes:

  • Federal Direct Subsidized Stafford / Direct Loans
  • Federally Unsubsidized Direct Stafford / Direct Loans
  • Federal direct loans PLUS
  • Federal Direct Consolidation Loans
  • Federal loans for family education (FFEL)

It is important to note that private student loans are not eligible for a direct consolidation loan.

2. Student loan refinancing

With student loan refinancing, federal and private student loans are eligible. You can choose to refinance Federal Student Loans, Private Student Loans, or both.

With student loan refinancing, you combine one, more, or all of your existing student loans into one student loan. This new student loan is a private student loan that replaces your old student loans.

Interest rates: student loan consolidation and student loan refinancing

1. Consolidation of student loans: With the federal student loan consolidation, your interest rate will not not decrease. Rather, it is equal to a weighted average of the interest rates on your existing federal student loans rounded up. at the top to the nearest 1/8%.

The goal of federal student loan consolidation is an organizational tool. It simplifies your federal student loans and combines them into a direct consolidation loan.

2. Student loan refinancing: When you refinance student loans, you receive a new interest rate that is lower than the interest rates on your current student loans. If you have a strong credit profile and income, you may qualify for a lower interest rate, which could save you thousands or tens of thousands of dollars on your student loans.

With student loan refinancing, the result is a new student loan with a lower interest rate, one monthly payment, and one student loan manager. You can also choose a fixed or variable interest rate.

Student loan repayment: student loan consolidation and student loan refinancing

The Federal Student Loans Pool and the Private Student Loan Pool offer different options for your loan term for your student loan repayment.

1. Consolidation of student loans: With the Federal Student Loan Consolidation, the standard repayment term is 10 years. There are also income-based repayment plans such as PAYE or REPAYE which can extend your repayment term to 20 or 25 years.

2. Student loan refinancing: Although it varies among lenders, student loan refinancing offers more options for student loan repayment terms.

Most student loan refinance lenders allow you to pay off your student loans over 5, 7, 10, 15, and 20 years. If you want to pay off your student loans as quickly as possible, you’d better choose a shorter repayment term. If you want more time to pay off your student loans, you can choose a longer repayment term.

Shorter repayment term: higher monthly payment; less interest; pay off student loans faster

Longer repayment term: lower monthly payment; more interest; pay off student loans more slowly

Do I have to consolidate my student loans?

Here are the main reasons to consolidate student loans with a direct consolidation loan:

  • Organize and simplify student loan payments: If you have multiple federal student loans, a direct consolidation loan can provide you with just one monthly student loan payment. You will also have a payment date and a student loan manager.
  • Participate in income-driven repayment plans: If you plan to use an income-based repayment plan for your federal student loans such as PAYE, REPAYE, IBR, or ICR, for example, you can choose to consolidate your federal student loans.
  • Other federal benefits: There are certain advantages associated with federal student loans such as deferral and forbearance.

Should I refinance my student loans?

Refinancing a student loan also simplifies your financial life with just one monthly payment, one student loan manager, and most importantly, a lower interest rate.

Unlike federal student loan consolidation, only student loan refinancing can earn you a lower interest rate. A lower interest rate can mean big savings on the total cost of your student loan and help you pay off your student loans faster.

The main reasons for refinancing student loans include:

  • You want lower your interest rate and save money
  • You have a strong credit score and stable income
  • You want pay off your student loans faster
  • You want the flexibility of a fixed or variable interest rate
  • You do not plan to use public service loan discount or income-based repayment plans
  • You have a strong credit history and are financially responsible

Can You Refinance Student Loans After Consolidation?

Yes, you can refinance student loans after consolidation. If you have already consolidated student loans, you can refinance student loans. There is no fee for refinancing student loans and no prepayment penalty. There is also no limit to how often you can refinance student loans.

Is Consolidation Or Refinancing Better?

Here’s a quick summary to help you make a more informed decision:

  • Direct consolidation: organizational tool; the same or slightly higher interest rate; federal repayment plans
  • Student loan refinancing: organizational tool; lower interest rate; flexibility; to save money; pay off student loans faster

This student loan refinance and consolidation calculator shows you the total cost of your student loans in each scenario and how much money you can save.

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