Refinancing, Consolidation are often used interchangeably. There is a very common misconception regarding what exactly student loan consolidation and student loan refinancing are, how they differ from each other, and which is the best option for borrower to lessen the burden of his or her student loan.
Borrowers are not able to take choose the right option as they are often confused between refinancing and consolidating.
Even though they can serve a similar purpose, consolidation and refinancing are not the same.
What exactly is student loan consolidation?
Consolidating is exactly what it sounds like: condensing multiple loans offers into one single loan. A student loan consolidation combines all federal loans into one loan for free. Managing multiple federal student loans is a headache. Chances to miss out bill increases especially when you receive lots of statements every month.
The loan management can be simplified by student loan consolidation. Merging your federal loans into one single loan can save you a lot of trouble. You will have to deal with only one monthly statement, one due date, and one set of loan terms, which usually consists of a low, fixed interest rate.
Federal Government offers federal student loan consolidation, and it limits to federal student loans, not private loans. If you owe both federal and private student loans, federal government does not consolidate in that case.
That doesn’t mean you are left with no option to simply and combine your private and federal loans into one loan. Yes, it is still possible but instead of federal consolidation, you have to opt for refinancing your loans and that is done by private lender, such as bank or credit union.
How is refinancing different?
Refinancing is like applying for a new loan to pay off your existing loans. This is an effective move if you owe multiple private loans with variable interest rate and want a fixed interest rate that saves you from rate hikes in near future and in turn saves your money. Private loan refinancing is done by private lender like bank and credit unions.
If you are considering refinancing private student loans, prepare a loan application and go through underwriting process, through which lender can evaluate your credit rating and income, to conclude if you are eligible. This process is required as refinancing is through private lender.
If you are found eligible for refinancing, be happy to get a lower interest rate that will save your money over the life of the loan. Lower payment lets you utilize the cash for paying of other debts, buy a new house or car, take a vacation and much more. If you are capable of making higher payments, you can pay off your debt faster.
If you want to combine federal and private loans into single loan, refinancing is the only way! But before merging your federal loan and private loan it’s important to know that you will lose on all the benefits of federal student loans that a government offers.
Some of the benefits for federal loans like they offer income based repayment to help students manage their debt. In case of financial hardship like loss of job, federal loans give you an option of forbearance or deferment. Both options give relief to borrowers as you can stop making payments temporarily.
There are no such perks from the side of private lenders. No doubt, refinancing will simplify your financial life, but before merging federal loans and private loans, be sure you have a strong financial base.
The outline is, if your credit rating is good, you are financially stable, and would like to merge all your loans into one loan at a lower interest rate and you do not want to preserve your access to federal loan benefits , then refinancing is the best option you should consider.
If none of the above option works for you, call for help.
If you do not qualify for refinancing your private student loan, make efforts on improving your credit risk profile. Which means pay your student loan payments on time and avoid building up credit on credit card balances. This probably improves your risk profile and helps you qualify for refinancing.
By any chance, if you are going through financial difficulty, call your servicer and ask for help by explaining your situation. The programs offered differ by private student loan company. Nothing is wrong in making call, asking for help. Remember one thing: if you do not ask help regarding payment, servicer is not going to walk to you to give solutions.
No solution is perfect for the growing student loans problem. It could be of a big help if you qualify refinancing or avail advantages of income-based repayment.
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