Student Loan Consolidation Vs. Refinancing


  • You can only consolidate federal loans; private student loans are not eligible for the program.
  • Refinancing student loans may earn you a lower rate than your original loan terms.
  • When you refinance federal loans with a private lender, you lose some key borrower protections.
  • Learn more about Insider’s student loan coverage here.

The difference between loan consolidation and refinancing can be confusing, especially because people sometimes use the terms interchangeably. However, these are two different processes, and depending on your financial goals, one may be better for you than the other.

What is the student loan consolidation?

You can consolidate or combine multiple federal loans into one loan with a direct consolidation loan. There is no charge to consolidate your federal loans. If a private company offers to help you apply and requires a fee, it is a red flag. The consolidation of student loans does not require a credit check.

Keep in mind that you won’t save money by consolidating your student loans, but that doesn’t mean you can’t benefit from the process. You’ll have fewer payments to track each month, and if you’re unhappy with your loan manager, you’ll get a new one upon consolidation.

If you consolidate loans other than direct loans, you may become eligible for income-tested repayment plans and civil service loan forgiveness. If you already have direct loans, you can retain these benefits during consolidation.

If you have federal variable rate loans (which were last disbursed in 2006), consolidation will allow you to switch them to fixed rate loans. You can also reduce your monthly payments by opting for a longer repayment term, although this option will cost more in interest overall.

However, when you consolidate your loans, any unpaid interest becomes part of the principal balance of your new loan. This means that interest can accumulate on a larger principal balance than if you had not consolidated.

What is student loan refinancing?

If you are looking for a lower rate on your student loans, you will want to refinance them. Depending on your current financial profile, private lenders may offer you better terms than your original loan. Refinancing a student loan will require a credit check and your rates will be based on it.

You can switch from a fixed rate loan to an adjustable rate loan when you refinance, which can allow you to snag a lower rate. However, as the name suggests, variable rate loans can fluctuate and you may end up paying a higher rate than if you had gone for a fixed rate loan.

Use caution before refinancing federal student loans. You will forgo all current and future government borrower protection, such as COVID-19 loan forbearance, currently in place until January 31, 2022, and federal student loan relief programs like loan forgiveness. for the public service.

You will also not be eligible for specific repayment options such as income-based repayment plans, which take into account your specific income and family size when determining monthly payments and protect you in the event of a loss. Job Loss. Your interest savings might not be worth losing these benefits.

On the other hand, if you are refinancing private student loans, there is almost no downside. There are usually no refinancing fees, and you may be able to get better rates on your new loan, especially if your credit score has improved since you got your original loan.

When deciding between refinancing or consolidating your loans, make sure you know the ins and outs of both processes and choose the one that’s right for you.

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