What’s the Difference Between Student Loan Consolidation and Refinancing
When you earn your degree, there’s a whole new world waiting for you. But your student loans are also waiting to be repaid, and that can place a significant burden on you, your life, and your finances.
If you’re looking for a way to make repaying your student loans more manageable and affordable, there are options available. You can consider consolidating or refinancing your loans – and both choices offer benefits.
Here are the differences between student loan consolidation and refinancing. Though the processes seem similar, they work in different ways and have different requirements.
Student Loan Consolidation: One Loan Instead of Many
Student loan consolidation is, simply put, the process of rolling all of your student loans into one. Consolidating your loans gives you one monthly payment, one loan account, and a single interest rate.
Student loan consolidation makes it easier to manage your student loan debt. Instead of managing multiple loans, payment due dates, and loan accounts, you’ll deal with just one.
There are two types of consolidation available:
- Federal Student Loan Consolidation: If you have student loans through the Department of Education, you can consolidate them into a single Direct Consolidation Loan with the federal government.
- Private Student Loan Consolidation: If you’re carrying multiple private student loans, either with one lender or multiple private lenders, you can consolidate them with a private loan company.
Both federal and private student loan consolidation offer borrowers the opportunity to get different loan terms and a new repayment schedule. The details will differ depending on whether or not you’re consolidating federal or private loans.
If you’re interested in consolidating federal student loans, it’s important to know that consolidation is a little less flexible. The standard repayment term for federal student loan consolidation is 10 years, but you may be able to extend your repayment to 20 or 25 years if you apply for a special repayment plan.
When you consolidate your student loans, you may not be able to adjust your interest rate. It’s up to your lender, and the terms of your new single loan, to set the interest rate. Federal student loan consolidation determines your interest rate for your consolidated loans by weighting the average of all interest rates on your existing loans.
Who Qualifies for Student Loan Consolidation
Student loan consolidation is available for any borrower who wants to take advantage of it. As mentioned above, borrowers with both federal and private loans can consolidate their debt.
In order to qualify for consolidation, you’ll simply need to research your options. If you’re a federal student loan holder, you can check with the Department of Education to see what your consolidation options are, and what your new interest rate would be. If you’re a private student loan holder, you can research your options with your current loan company as well as others.
Make sure to search for options that allow you to see your consolidation terms upfront. You’ll want to be able to compare the rates before choosing to consolidate your loans with any private lender.
Student Loan Refinancing: Changing Your Loan and Its Terms
Student loan refinancing is another way to simplify your student loans. Like consolidation, refinancing allows you to combine all of your debt into one single loan, giving you one monthly payment, one interest rate, and one student loan servicer.
However, unlike consolidation, refinancing your student loans allows you to secure new loan terms, a new repayment plan, and a lower interest rate. Together, these changes can lower your monthly payments and the amount you’ll pay over the lifetime of your loan.
Ultimately, student loan refinancing gives borrowers more options. If you’re looking for ways to make repayment easier, refinancing can do exactly that. When you refinance your loans, you’re able to make the following choices:
- Your repayment term: Most student loan refinancing lenders give you the choice to shorten or extend your repayment period. You can choose anywhere from 5 or 7 years to as long as 15 or 20 years.
- Your interest rate: While your interest rate will be determined by your credit score and your current financial situation, you can search for lenders who will refinance your student loans and offer a lower interest rate. You can choose to refinance with a company that gives you the lowest or best rate possible.
- Fixed or variable interest: Refinancing also gives you the opportunity to opt for a fixed interest rate or variable interest rate. This means you can choose an interest rate that remains unchanged for the loan’s lifetime, or one that’s subject to change any time.
Student loan refinancing is available for anyone with student debt. Whether you’re carrying federal loans, private loans, or a combination of the two, refinancing is available. It’s important to know that you’ll only be able to refinance your student loans based on type – for example, all of your federal loans will need to be refinanced together.
And when you refinance your student loans, your old loans disappear. In their place you’ll have an entirely new student loan. This means that your new lender has paid off your original loan, and you’ll deal only with the lender who handled your refinancing going forward.
Who Qualifies for Student Loan Refinancing
Student loan refinancing is available for anyone with student loans, both federal and private. If you’re interested in refinancing, you’ll want to make sure you have a strong credit history and are ready to research your options.
Anyone can see if they qualify for refinancing. To find out which lenders might be a good fit for your loans and the creation of a new loan. You’ll find a number of refinancing options online, and you should look for easy ways to compare these lenders’ offers, interest rates, and loan terms.
Is Consolidation or Refinancing a Better Option?
If you’re trying to determine whether consolidating or refinancing your student loans is the better option for you, here’s a quick summary:
- Consolidation will reorganize multiple loans into a single loan at the same (or slightly adjusted) interest rate.
- Refinancing will reorganize multiple loans into a single loan with a lower interest rate and different repayment schedule. Loan terms can also change.
Figuring out which option is right for your student loan debt may vary, but it’s important to know your options and to do your research before deciding which action to take.