Jit has the potential to build a prosperous society financial future. I thought that was the whole idea of going to college. However, if you have a lot of student debt and significant monthly payments, your financial situation may not be as ideal as you had hoped.
You may be able to change that by refinancing or consolidating your student debt. But how do these two choices differ from each other? What choice will impact your life, then?
Terms “refinancing” and “consolidate” are frequently used in connection with student loans. Although they have different meanings, both alternatives serve the same purpose – to simplify your student loan repayments by combining multiple loans into one loan with one monthly payment.
What each solution can do for you is where the biggest differences lie. You refinance your federal and private student loans at rreduce interest chargesand you combine your federal loans to have more control over them.
Student Loan Refinance
You may 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 amounts. While some of your loans may have fixed rates, others may have variable rates. You can consolidate all of your student debt, both federal and private, into one more affordable loan using student loan refinancing, which is only possible through a private lender. If your credit is in good standing, the new interest rate on this refinanced loan may be lower.
To qualify for a refinance loan and get a cheaper rate, you must have a strong credit history or a co-signer with good credit. Another crucial fact to consider is that when you refinance a federal loan using a private loan, you are effectively converting that federal loan into a private loan. Therefore, you should not include your federal loans in your refinance if you want to take advantage of the benefits of 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 retain the security and other benefits that come with them. Consolidating all of your federal student debt into one loan from the federal government is known as federal loan consolidation. The federal government does not allow you to consolidate private debt, unlike refinancing into a private loan, which allows you to refinance federal and private loans.
Another important distinction with consolidation is that the interest rate, which will be fixed, will not be lower. Instead, it will be a weighted average, rounded to the nearest 1/8%, of all the interest rates on your current federal loans.
Let’s say you have six federal student loans. The interest rates of three of them are 5%while the rates of the other three are seven%. Your new interest rate, based on the weighted average, would be 6% if you consolidated. This indicates that three of your loans will experience rate increases, while three will experience rate decreases. Consolidation, however, would result in a single loan with a 6% interest rate.
Which should I choose?
Although they work in different ways, both refinancing and consolidation can help you pay off your student loan debt. Refinancing is not an option for people whose credit rating does not exceed lenders’ requirements, despite the fact that it can help you save money and give you great flexibility in your term of reimbursement and your monthly payments. Additionally, you will no longer be eligible for federal loan benefits.
Consolidation won’t save you money; in fact, it may cost you more; but it can help you achieve your goals without sacrificing the benefits provided by the Department of Education.
Research both alternatives and compare student loan refinance rates if you’re trying to decide between refinancing and consolidating your debt. Each scenario is unique, so while it might work for a friend or family member, that doesn’t mean it’s the perfect decision for you.