Should You Consolidate or Refinance Your Student Loans
If you are interested in lowering the payments or interest rates on your student loans consolidation or refinancing are possible options. The terms consolidation and refinance are often used interchangeably. Consolidation is when you combine multiple loans into one using a Federal Direct loan program. Refinancing is when you get a new loan for the purpose of either extending the terms or lowering the interest rate through a private lender.
Student Loan Consolidation
A Direct Consolidation Loan is a federal loan program. There is no cost to you to consolidate and the interest rate is calculated based on the average of the interest rates on the loans being consolidated. After your loans are consolidated you will have one monthly payment instead of multiple payments for all of the student loans you might have.
The way student loans are disbursed is that for every year of school that you need financial aid you fill out the FAFSA form and are given a certain amount for the year; so for every year you were given student loans you will have a different loan. If you went to undergrad for four year and each year you were given a direct subsidized loan that would count as four different loans; if you had a direct unsubsidized loan each year that would be eight total loans. Instead of making eight different payments on each loan you could consolidate them all and possibly include any private loans into one federal direct consolidation loan, and make one payment.
Besides combining all your loans into one loan so you only have one payment there are also other advantages to the Direct Loan program. One of which is that you can take advantage of income-driven plans and public service loan forgiveness. Also, if you have loans that have variable rates they can be combined into the consolidation loan so that the rate is now fixed and you don’t have to worry about it changing.
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Student Loan Refinance
What consolidation does not do is decrease your interest rate as it is an average of you current loan rates. If you’re interested in decreasing the amount you pay in interest on your loans then you’ll have to look at refinancing. The disadvantage to refinancing is that you will no longer have federal student loans; your refinanced loan will be a loan through a private lender and will be looked at as a private loan.
You’ll lose out on any benefits of federal loans such as income-driven repayment or deferment if you were to go back to school or lose your job. Also, if you’re working for a non-profit organization you will no longer qualify for student loan forgiveness if you refinance your student loans. Once you refinance you no longer will have student loans, instead you’ll have a private loan from a private lender and if you’re looking to purchase a home or take out other loans this type of debt might be looked at differently compared to federal student loans.
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If you feel secure in your job, don’t work for a non-profit and you’re planning on paying off your loans as quickly as possible; refinancing might be an option for you. If you’ve ever read The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness by Dave Ramsey , he suggests never refinancing loans as it usually just extends the loan terms and the length of time you’re paying on your loans. If you’re shortening the term of the loan, from 10 years to 7 or 5 years as well as lowering the interest rate it can help you save money in the end.
Find the Best Interest Rate
If you’ve decided that refinancing your student loans is the direction you want to go. You should check with different lenders to see where you can get the best interest rate. Credible.com makes it easy to check interest rates for multiple lenders at one time. They have a number of partner lenders that they work with. It’s like buying a plane ticket on Travelocity where you are given a price for a number of different airlines and you can pick the best one.
The interest rates on credible.com are currently under 3% and there is no cost to use their services. Also, by using this link and successfully refinancing a student loan over $20,000, you and I will receive $250!
Credible.com is a great starting point as you can get rates from multiple lenders but it’s always good to shop around. If you’re part of a bank or credit union they might have other options for you as well. I’ve seen advertising for a bank mostly located in CA offering student loan refinance with interest rates in the 2% range, so depending on where you live there may be other offers out there.
Depending on your situation and goals consolidation and refinancing might be options for you to take control of your student loans. There are pros and cons to both and you should look at all options carefully, as once you commit there is no going back to your old loans.
Have you refinanced or consolidated your student loan? Let us know how it worked out for you. Please comment below the original post, sign up to receive future posts by email and share with your friends!
