Student Loan Refinancing vs. Consolidation: What's the Difference?

Student Loan Refinancing vs. Consolidation: What’s the Difference?

Refinancing and consolidation are sometimes used interchangeably, however they really have somewhat totally different meanings.

College graduate hugging his parents

College graduate hugging his dad and mom

Image supply: Getty Images.

When it involves student loans, the phrases refinancing and consolidation are sometimes used interchangeably, as each usually contain combining a number of student loans into one. However, it’s essential to comprehend that they really have considerably totally different meanings.

Refinancing versus consolidation

The quick model is that refinancing refers to acquiring a wholly new loan as a way to repay current loans. When you refinance loans, you’ll have to undergo a brand new loan utility course of and can possible need to conform to a credit examine, earnings verification, and different assessments of your {qualifications}. Based on how well-qualified you’re, your new loan shall be given a brand new rate of interest — that’s, the rates of interest on the loans being refinanced play no half in figuring out your new rate of interest.

You’ll get hold of a brand new loan and its proceeds shall be used to repay your specified current loans. When you refinance student loans, the brand new loan proceeds are sometimes despatched on to your current student loan servicers.

On the opposite hand, student loan consolidation means combining your current student loans into one. The commonest type of student loan consolidation is a Direct Consolidation Loan, which is used to mix a number of federal student loans into one. While you’re technically acquiring a brand new loan, you don’t need to undergo a brand new underwriting course of — your consolidation loan’s rate of interest will merely be a weighted common of the rates of interest in your current loans.

For a simplified instance, when you consolidate two $10,000 federal student loans, one with a 5% rate of interest and the opposite with a 7% rate of interest, you’ll obtain a $20,000 consolidation loan with a 6% rate of interest.

Why you may wish to consolidate your student loans

Consolidation generally is a good transfer for a lot of federal student loan debtors. The most evident purpose to consolidate is to simplify your compensation.

READ:   What to Know About Federal Student Loans

As a private instance, after I obtained my bachelor’s diploma, I had a complete of six federal student loans. Three of them have been backed loans and the opposite three have been unsubsidized. Not solely did I’ve six, however they have been serviced by two totally different corporations, so I needed to ship checks (this was earlier than digital fee was widespread) to 2 totally different locations. By acquiring Direct Consolidation Loans, I mixed my federal student loans into one easy-to-understand invoice and solely needed to ship one examine.

It may also be a wise concept to consolidate when you have any federal student loans that aren’t Direct Loans and you’re employed in public service. Federal Stafford Loans, Federal Perkins Loans, and PLUS Loans are some examples. On their very own, these loans don’t qualify for Public Service Loan Forgiveness (PSLF), however after you mix them right into a Direct Consolidation Loan, they do.

Why consolidation may be a foul concept

On the opposite hand, there could possibly be good causes to not consolidate. One huge purpose is when you’ve already been making certified funds towards PSLF or on an income-driven compensation plan. These loan forgiveness packages require a sure variety of funds, and by consolidating, you’ll lose credit for any qualifying funds you’ve already made.

It’s essential to say that consolidation isn’t an all-or-none selection. You can select to not embody sure loans in a Direct Consolidation Loan.

How to consolidate your student loans

If you resolve that consolidating your federal student loans is one of the best transfer for you, the applying is on the market on-line at StudentLoans.gov. As a part of the applying, you’ll choose a consolidation servicer, who will course of your loan consolidation. One essential level: Until you’ve obtained affirmation that your current federal student loans have been paid off by your new Direct Consolidation Loan, you must maintain making funds on them.

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Why you may wish to refinance your student loans

As I discussed, refinancing means acquiring a wholly new loan to repay your current student loans. Refinancing is completed via personal lenders, and whereas most individuals who refinance student loans have multiple to repay, there’s no purpose you possibly can’t refinance a single student loan if you wish to.

There are a number of explanation why refinancing your student loans via a personal lender generally is a good concept:

  • Most clearly, you possibly can probably decrease your rate of interest. There are some personal lenders who provide extremely aggressive APRs on refinancing, with each mounted and variable rates of interest, particularly for debtors with sturdy credit scores.

  • You might be able to decrease your month-to-month fee. For instance, in case your current student loans have a 10-year compensation time period and also you refinance them right into a loan with a 20-year time period, even when your rate of interest stays the identical, your month-to-month fee will drop considerably.

  • Just like with consolidation, refinancing might help make your monetary life easier. This is very true when you’re refinancing loans that you simply obtained via multiple lender, and also you’re presently having to make a number of loan funds every month.

  • Refinancing generally is a good choice when you have a cosigner in your current loans and wish to get their title off of them. If you are feeling that your credit and earnings {qualifications} are ok to justify refinancing a loan in your personal title, this could possibly be a solution to launch your cosigner from the authorized obligation.

Why refinancing may be a foul concept

While refinancing student loans is actually a wise transfer for a lot of debtors, it isn’t your best option for everybody. There are some good explanation why you may not wish to refinance your student loans.

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First and foremost, it’s sometimes a foul concept to refinance federal student loans via a personal lender. Federal loans have some distinctive benefits, corresponding to the power to qualify for income-driven compensation plans and loan forgiveness packages, in addition to usually having extra versatile deferment and forbearance choices than personal loans. While it isn’t all the time a foul concept, I’d counsel considering lengthy and onerous earlier than utilizing a personal lender to refinance your federal loans.

Additionally, it may be a foul concept to refinance in case your current student loans have already got a aggressive rate of interest or have some precious options you don’t wish to lose.

How to refinance your student loans

There are a rising variety of personal corporations specializing in student loan refinancing. If you’ve determined that student loan refinancing is the correct transfer for you, one of the best factor you are able to do is to check the rates of interest and different options provided by a number of totally different lenders. Our finest student loans web page is a superb place to begin, and a lot of the lenders on there’ll let potential refinancers examine their rates of interest with out affecting their credit rating.

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