When to Choose Student Loan Consolidation or Refinancing
Taking on debt to complete either an undergraduate or graduate level degree is the new norm for most students. Tuition costs have risen substantially at both public and private institutions, making it all but necessary to acquire multiple student loans to cover costs, allowing the rise of American student loan consolidators. According to recent statistics from MarketWatch, the total student loan debt burden tops more than $1.3 trillion – yes, trillion – and continues to grow at an estimated $2,726 per second. To make matters more tumultuous, student loans are dispersed as needed, meaning some student borrowers may end up with a number of loans, each with an applicable interest rate and monthly payment. It is no wonder that finding options for easing the management of student loan repayment through either consolidation or refinancing weighs heavy on the minds of borrowers.
Although the terms student loan consolidation and refinancing are often used interchangeably, the two strategies differ slightly. Let’s dive into the differences and how each option may fit in to your overall financial picture.
What It Means To Consolidate Student Loans
You can think of student loan consolidation as a merger of your outstanding loans, creating organization and in some cases, additional peace of mind. In essence, consolidation is the process of combining multiple federal student loans into a single, large loan, completed through a simple process online. Instead of carrying multiple interest rates and varied monthly payments on five, seven or even 10 loans taken out over the course of your degree program, a consolidation loan streamlines your loans into one manageable debt.
Borrowers with federal student loans are able to consolidate to receive one interest rate (based on the average of all rates applied to the original loans) and one corresponding monthly payment that does not change over time. In addition to having the ease of one loan payment to keep track of, students who go through the consolidation process also have the ability to participate in the various repayment programs set forth by the federal government. For example, if you are a new graduate and just beginning your time in the workforce, an income-driven repayment based on what you earn each month is helpful in keeping monthly payments low for an extended period of time. Alternatively, borrowers looking to speed up repayment have repayment programs available to expedite paying down the loan balance. You’re in the driver’s seat when it comes to how much you pay, and how long repayment takes with a student loan consolidation.
What It Means To Refinance Student Loans
Student loan borrowers also have the option to refinance their debts – the process of combining multiple private and/or federal loans into a single debt obligation. The definition of refinancing sounds eerily similar to consolidation spelled out above, but adding private loans into the mix changes the game. Through refinancing, borrowers have the option of including both private and federal loans into the new, larger refinanced loan, creating a manageable debt payment each and every month. Private lenders, including banks, credit unions and marketplace lenders, offer a wide range of student loan refinancing options for borrowers; however, unlike consolidation which is done through a simple request online, refinancing requires a credit check and income verification in most cases.
Refinancing has its perks for some borrowers, most prominently in the realm of interest rates. Private loans taken out during college often carry higher interest rates than federal loans, but refinance lenders are able to offer far lower interest rates based on an established credit history. Saving on interest charges makes refinancing attractive to borrowers with substantial private loan balances upon graduation. Unfortunately, refinancing student loans with a private lender takes away the option of changing repayment plans as income or cash-flow shifts. Once you’ve completed a student loan refinance, your monthly payment is set for the life of the loan.
Where Each Option Fits In
Both consolidation and refinancing are tools in creating a more organized, simple way to manage your student loan debt, as they each take away the need to track multiple loans with different monthly payments and interest rates. However, borrowers benefit from each strategy in different ways. Consolidation is best used for student borrowers with substantial federal loan debt, and those who want flexible repayment options available for the duration of the new loan. Refinancing, on the other hand, can be a smart move for borrowers already burdened with private loan debt, or those with little concern over maintaining a fixed payment over time. For most borrowers, consolidation should be the first line of defense in simplifying the student loan picture, followed closely by alternatives made available through private lender refinancing.
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