Consolidating or refinancing student loans might seem like a good choice, but there are several aspects to consider before determining if it’s the right choice for you. Be sure to ask a ton of questions and evaluate all pros and cons so you can pay off your loans as quickly as possible while saving your money.
Difference between Consolidation and Refinancing
Consolidation
This involves combining multiple loans into a single loan, thereby you would only have to manage one loan instead of dealing with several separate loans, monthly payments, and billing statements. Consolidation is possible only if your student loans were procured from government programs. The major benefits associated with consolidation are specifically reserved for government loans.
Debt consolidation programs can be perplexing. The general idea is that the agency will negotiate with creditors to make payments more affordable. You will make only one payment, and that payment goes to the agency, which then pays off your multiple loans for you.
Refinancing
Refinancing involves replacing a loan with a completely new loan, typically with much better terms. The goal is to get a lower interest rate in order to reduce your long term interest costs and monthly payments. Instead of the term refinancing, think of this as “optimizing” your debt so you pay less.
Consolidating Federal Student Loans
When you’re consolidating your federal student loans, the government will merge all your debts into a single new loan known as a Direct Consolidation Loan. You can apply for this once you graduate. Most federal student loans are acceptable for consolidation, including subsidized and unsubsidized Direct loans, subsidized and unsubsidized federal Stafford loans, Direct PLUS loans and many more.
Pros of Consolidating
- Direct Consolidation loans offer one single payment and lower monthly payments.
- Consolidating federal loans is free, so watch out for companies that offer to consolidate federal student loans for a fee.
- No credit check is needed to consolidate federal student loans and can be done online.
You should also consider other ways of tracking your debt and managing payments. This is because Direct Consolidation Loans have drawbacks as well.
Cons of Consolidating
- A reduced monthly payment means paying the loan for an elongated period of time, which will cost you more money in the long run due to interest.
- When you consolidate your federal student loans, you lose the ability to target your highest interest or highest balance loans using methods called the debt avalanche or debt snowball.
- Certain federal consolidation loans might come with higher interest rates than private loans. For instance, the average interest rate for Direct-unsubsidized loans for graduate or professional students is 6.6%, while some student loan refinancing lenders offer below 3%. This difference adds up over time.
You can calculate the figures and percentages using a student loan consolidation calculator, making it easier for you to determine which loans to take.
Be sure to assess all your options, from Direct Consolidation loans to other strategies such as refinancing.
Here’s A list of the Best Student Loan Consolidation Lenders:
- LendKey – Best for Undergraduate Loans
- SoFi – Best for High-Income Borrowers
- Education Loan Finance – Best for Low-Interest Rates
- CommonBond – Best for Unemployment Protection
- Citizens Bank – Best from a Traditional Bank
- PenFed Credit Union – Best from a Credit Union
- Earnest – Best for Low Credit Borrowers
- Laurel Road – Best for Medical Residents
Refinancing Private Student Loans
Private student loans Refinancing involves taking up a new loan to pay the remaining cost of your previously procured private student loan. Refinancing is done in order to avail of a lower interest rate on your new loan resulting in money saved. Your financial history, which includes your credit rating, amount of income, job history and education will determine your revised interest rate when you refinance your student loans. Parents who have taken out loans for their child are also eligible to refinance their parent plus loans at a better rate.
You would ideally need a moderate-to-high credit rating to be eligible, and interest rates vary from 2% to 9%.
You should consider refinancing if you have:
- Good credit reports where you have shown prompt student loan payments after leaving your school or college.
- Good or excellent credit scores.
- Proof of stable employment history and good income amounts.
- Been affiliated to a guarantor or a co-signer with good credit history.
Consumer policies and benefits offered in federal loans do not apply to refinanced student loans. These include the option to link payments to income and other opportunities pertaining to loan forgiveness. You can use a student loan refinance calculator to compare monthly payments between private student loan refinancing agencies and find the plan that best works for you.
Pros of Refinancing Private Student Loans
- You can create an easy-to-manage financial situation, get better terms and secure lower monthly payment.
- A major benefit of refinancing private student loans is the potential to secure a much lower interest rate. The rate will be based on your credit score.
- If you possess a good credit score, or if your income and employment history is considerable, you are likely to receive a low rate, making refinancing a good option.
Cons of Refinancing Private Student Loans
- A point to note when opting for refinancing is if you are extending the repayment term, you will have incurred more payments due to the interest applied over a period of time.
- A federal Direct Consolidation Loan is free of charge, whereas some private lenders will charge an initial, or processing fee. It’s best to avoid those lenders who charge this fee.
- A credit check is needed to consolidate private student loans through refinancing. If your credit history is poor, you may have trouble being eligible.
