Both the refinancing and consolidation of loans are popular practices across the lending world. But they are particularly important for the nearly 45 million adults with student loans in the United States. Improving your financial situation as much as possible through refinancing or consolidation student loans can be a great idea. Let’s investigate the difference between consolidating and refinancing student loans.
What Does It Mean to Refinance Student Loans?
It’s likely that even if you’ve never done a refinance yourself, you’ve heard of the process. But how do you answer the question “What is refinancing?” A student loan refinance is getting a new loan to replace a current one. This is a standard procedure that’s generally considered an intelligent financial choice. A few things make refinancing a good idea:
- You can lower your interest rates – The interest rate of your loan is one of the most important aspects. A higher rate means you’re going to pay more over time than with a low one. By refinancing, individuals can replace their current loan with one that has a lower interest rate.
- You can change the repayment term – The term of your loan affects the amount you have to pay each month, as well as how long you hold the debt.
- Add or remove co-signers – If you have a co-signer on a loan you’d like to remove, or need a co-signer in order to qualify for a better interest rate, this is perfectly attainable through a student loan refinance.
- There’s no fee to refinance – Refinancing many forms of debt requires an origination fee. This can lead some people to avoid refinancing, as it’s not always affordable in the moment. This, however, isn’t the case with student loans, which come with no origination fees.
The other important thing to know about refinancing student loans is that it can only be done through private lenders. That’s right—you can’t refinance to a federal loan. So, refinancing must be done through a private lender. We’ll look more at how this relates to consolidation in the next section.
What Does It Mean to Consolidate Student Loans?
Student loan consolidation is a specific form of refinancing where multiple loans are combined into a single new one. This is great for people who want to simplify their repayment plan. And like when you refinance, private consolidation loans can lower your interest rates. This, however, is one place where federal and private lenders diverge.
While student loans can be consolidated through the federal government or through a private lender, there’s an important distinction to know about Direct Consolidation Loans. While you will be able to retain your federal loan benefits when you consolidate through the government, you won’t get an improved interest rate.
This is something you need to carefully consider before making any decisions whether to refinance or consolidate. While getting a better interest rate is certainly an essential consideration when thinking about your student loans, many individuals won’t want to give up federal benefits like income-driven repayment plans and loan forgiveness.
What Are Differences Between Refinancing and Consolidating Student Loans?
Although many of the differences between refinancing and consolidating student loans have already been outlined in the previous sections, there are a few more distinctions between them.
Since the federal government only offers consolidation and not refinancing, you’ll only have to meet stricter credit requirements if you go through a private lender. Since refinancing can only be done with a private lender, some people might struggle to meet the threshold. This can be avoided by utilizing a co-signer.
Another main difference between consolidation through the federal government and refinancing via a private lender is the fact interest rates can’t be altered through the first option. Individuals who have certain kinds of federal student loans, such as Direct PLUS Loans, should seriously consider the benefits of lowering their interest rates by refinancing.
One final difference between federal consolidation and private refinancing is that federal loans only come with fixed rates, while private student loans carry both fixed and variable rates. It’s imperative you understand how variable rates can change over time before you go with one. When interest rates rise, you will end up paying more each month with a variable rate, while fixed rates will stay the same.
It’s wise to understand the difference between refinancing and consolidating student loans. When you’re armed with this knowledge, it’s possible to make more informed financial decisions.