The potential to build a prosperous financial future. I thought that was the whole idea of attending college. However, if you have a lot of student debts and significant monthly payments, your financial situation may not be as ideal as you had hoped.
You might be able to change that by refinancing or consolidating your student debts. But how do these two choices differ from one another? Which choice will have an impact on your life, then?
The terms “refinancing” and “consolidating” are frequently used in relation to student loans. Even though they have different meanings, both alternatives serve the same purpose-to make it simpler for you to pay off your student loans by combining several loans into a single loan with a single monthly payment.
What each solution can do for you is where the biggest differences are found. You refinance your federal and private student loans to reduce interest costs, and you combine your federal loans to have more control over them.
Student loan refinancing
You might have combined federal student loans with loans from private lenders to pay for your education. Each of the loans may have different terms, interest rates, and sums. While some of your loans might have fixed rates, others might have variable rates. You can consolidate all of your student debts, both federal and private, into one, more reasonable loan with the aid of student loan refinancing, which is only possible through a private lender. If your credit is in good standing, the new interest rate on that refinanced loan may be lower.
To qualify for a refinancing loan and earn a cheaper rate, you must have strong credit history or a cosigner with good credit. Another crucial fact to be aware of is that when you refinance a federal loan using a private loan, you are actually turning that federal loan into a private loan. Therefore, you shouldn’t include your federal loans in your refinance if you want to take advantage of the advantages that come with federal loans, such as income-based repayment alternatives and loan forgiveness. You could easily choose to refinance your personal loans as an alternative.
Student loan consolidation
Consolidation is an additional choice if you have federal loans and want to keep the security and other perks that go along with them. Combining all of your federal student debts into a single loan with the federal government is known as federal loan consolidation. The federal government does not permit you to consolidate private debts, in contrast to refinancing into a private loan, which enables you to refinance both federal and private loans.
Another significant distinction with consolidation is that the interest rate, which will be fixed, won’t be any lower. Instead, it will be a weighted average, rounded to the closest 1/8%, of all the interest rates on your current federal loans.
You have six federal student loans, let’s say. The interest rates on three of them are 5%, while the rates on the other three are 7%. Your new interest rate, based on the weighted average, would be 6% if you consolidated. That indicates that three of your loans will see rate increases, while three will have rate decreases. Consolidating, however, would result in a single loan with a 6% interest rate.
Which one should I choose?
Although they work in different ways, refinancing and consolidating can both assist you in paying down your student loan debt. Refinancing is not an option for people whose credit ratings don’t exceed the requirements of lenders, despite the fact that it can help you save money and provide you a lot of flexibility with your repayment term and monthly payments. Additionally, you will no longer be eligible for federal loan benefits.
Consolidation won’t save you any money; in fact, it can cost you more; but it can help you accomplish your objectives without sacrificing the benefits provided by the Department of Education.
Research both alternatives and compare student loan refinance rates if you’re attempting to decide between refinancing and consolidating your debt. Every scenario is unique, so even though one could be appropriate for a friend or family member, that doesn’t mean it’s the perfect decision for you.