Loan Consolidation or Refinancing

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​Loan Consolidation or Refinancing

​A common question is:  what is the difference between loan consolidation versus loan refinancing? This can be a confusing topic, especially since these terms are sometimes used interchangeably. The simple fact is that it depends on the kind of lender (ie, federal or private) offering the service. 

Federal loan consolidation 
Consolidating implies combining multiple student loans into a single loan. Federal loan consolidation is offered by the government and is available for most types of federal loans. Private loans are not eligible for consolidation through this program. Typically, this option doesn’t save you any money, since you’re simply charged the weighted average interest rate of the loans being combined. 

Potential benefits include:
  • Fewer bills and payments to keep track of each month. 
  • The ability to switch out older, variable rate federal loans for one fixed rate loan, which could protect you from having to pay higher rates in the future should interest rates go up. 
  • Lower monthly payments. However, this usually results in lengthening your payment term, which means you’ll actually have to pay more interest over the life of the loan. 
Private loan consolidation 
Similar to federal consolidation, a private consolidation loan allows a borrower to combine multiple loans into one and can offer the potential benefits listed above. However, the interest rate you receive is not a weighted average of your existing loans’ rates. Instead, a private lender will typically take a look at your history of dealing with debt and relevant financial information to give a new interest rate on your consolidation loan, then use that loan to pay off your other loans.

Essentially, if you’re consolidating student loans with a private lender, you are also in fact refinancing those loans. 
Student loan refinancing 
Refinancing is when you apply for a loan under new terms and use that loan to pay off one or more existing student loans. If your financial situation has improved since you first took out your loans, you may be able to refinance student loans at a lower interest rate, which can potentially allow you to: 
  • Lower your monthly payment.
  • Reduce the time it takes to pay off your loan.
  • Spend less money paying back your loan.
  • Choose a variable interest rate loan, which can be a cost-saving option if you plan to pay off your loan relatively quickly.  
As to whether you should combine federal and private loans, the answer depends on your situation. Federal loans offer certain benefits and protections (such as Public Service Loan Forgiveness and income-driven repayment plans) that do not transfer to private lenders.  If you’re considering refinancing, you should first take a look at your federal loans to see if any of these benefits apply to you. If you don’t anticipate needing or qualifying for federal loan benefits, getting a lower rate can save you a significant sum. 

So should you consolidate, refinance – or neither?   

Now that you know how these options compare, you’ll be better equipped to answer that question. ​
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