The talk about student loan consolidation and refinancing has been confusing. Many newly graduated students want to know about options for the student loans they took. These terms are sometimes used interchangeably but we’ll define and explain them precisely here. Then you can decide are you going to consider one or the other and why.
Student loan consolidation Explained
The majority of students have already taken more than five separate student loans before they graduated, federal and/or private. They must keep track of multiple monthly payments with different interest rates for all of them. They might benefit from student loan consolidation, incorporating all these individual loans into a new one. The interest rate is usually calculated as the weighted average of interest rates of all your old loans. You can choose to consolidate all or just several of your loans.
Federal consolidation is possible only for federal loans, and private companies can consolidate both federal and private loans. It’s important to note that you lose certain privileges, such as Public Service Loan Forgiveness and income-driven repayment plans, if you deal with federal loans through a private company. You mustn’t let go of them if you think you’re likely to need them.
Loan consolidation doesn’t help you save money on the long term, because your interest rates stay high. You might consider loan refinancing, where you’ll arrange different interest rate for a new loan. Consolidation is useful to help you never miss your payments and to simplify dealing with loans.
Is Student Loan Refinancing Different?
If you decide to refinance your student loans they will also be combined into a new loan, but with a different interest rate. This option is great for people who have stable jobs after graduation and a steady income, because their credit scores are better. If your credit score is better now, you present lower risk for refinancing companies and they can offer you better interest rates.
You can also choose to change your loan period, but if you prolong it too much, you’ll pay much more in interest. You need to know your finances well and calculate the best option for yourself. You must make sure you can comfortably pay the monthly amount for a loan. You’ll be able to pick either variable or fixed interest rates.
Fixed interest rates are usually higher but they remain constant during the entire loan period. You’ll always be able to predict how much have you repaid and how much do you owe. It’s important to find an offer where the interest rate is lower than your other loans combined. This is the safest option if you’re refinancing your loans.
Variable interest rates loans are great if you expect to be able to repay your loan quickly. The rates are very favorable currently, but they always might change. You need to be certain you’ll be able to make the payments on time if the interest rate increases.
How to Decide?
Take your time to go through all calculations thoroughly, without rushing. You must always first check do you qualify for any of federal student loans deferments or forbearances that might help. Student loan refinancing is the most often chosen by students who are in a stable financial situation and who don’t reasonably expect to need benefits that come from owing the state instead of a private company.
If you’ve decided that refinancing is the right option for you, you should apply for a new loan and do all the paperwork. Your credit history and income will be assessed.
If you’re able to afford bigger monthly payments you might be able to pay off your student loan faster. It’s worth remembering that you can refinance more than once if your credit score improves. You’ll be have to carefully assess all offers for a new loan and choose the option where you spend the least money overall. Student loan refinancing is a great tool for young people who want to take control over their debts. It can help you repay your student loans on better terms.