Student Loan Refinancing vs. Consolidation: What’s the Difference

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When you have more than one student loan, monthly payments can be difficult to manage. You need to keep track of the different loan amounts, their different interest rates, and their separate maturity dates each month.

There are options to combine your multiple student loans into a single loan so you only have one monthly bill and payment to manage.

Borrowers who choose to consolidate their federal loans with the government do so through the Direct Consolidation Loan program. While consolidation can certainly streamline your payments, refinancing is another option that can also offer the same simplified repayment and give you a lower interest rate.

Below, CNBC Select breaks down each one.

Federal consolidation for student loans

Borrowers can combine their state student loans through a direct consolidation loan to create a single student loan. Although their student loans are consolidated, borrowers still have access to the same protections they had with their old loans, such as: B. Student loan forgiveness and income-based repayment plans. This is a benefit of the government consolidating your federal loans.

Federal consolidation also allows borrowers to choose their new repayment terms, and it doesn’t require applicants to have good credit to qualify (which you do if you want to refinance). The interest rate is a fixed rate and is calculated as a weighted average of the interest rates on your original loans. If you’re looking for a lower interest rate, you need to refinance.

Student loan personal refinance

By refinancing, student loan loans replace their current private and/or federal loans with an entirely new loan through a private lender of their choice.

Refinancing student loans contains Consolidate by combining your federal and/or personal loans into one payment as a result of the process.

However, refinancing differs from federal loan consolidation in that borrowers have the opportunity to receive a lower interest rate and reduce the cost of their loans. Lenders typically look at several factors to determine a borrower’s refinancing rates, including their creditworthiness, income, debt-to-income (DTI) ratio, savings, payment history on their current student loans, and overall financial health. Borrowers can choose to have a fixed or variable interest rate.

Similar to federal consolidation, refinancing also allows borrowers to choose their repayment terms depending on how quickly they want to pay off their loans.

Those who want to refinance their student loans but may not have the credit to qualify can choose to be a co-signer. Some lenders even allow the co-signer to be removed after a period of consecutive, on-time monthly payments.

While refinancing could result in a lower interest rate, you lose any protections you have with government student loans, such as income-based repayment plans and student loan forgiveness. And now that federal student loan repayments and interest accrual are on hold, it’s not the best time to refinance federal loans.

bottom line

If you just want to combine your federal student loans to make managing your payments easier, the government’s direct consolidation loan program is the best answer. This way, you consolidate your loans while ensuring you don’t lose any of their federal benefits.

On the other hand, if you have high-interest private student loans, you should go down the refinance route. Refinancing through a private lender saves you money over the life of your loan while streamlining your monthly payments. Some private lenders offer their own protections, such as B. Forbearance and Forbearance, so make sure you do your research before applying.

Editorial note: Any opinion, analysis, review, or recommendation expressed in this article is solely that of Select’s editors and has not been reviewed, approved, or otherwise endorsed by any third party.


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