While loan consolidation and refinancing do have some common elements, there are some fundamental differences between the two worth considering. This is particularly true if you’re considering implementing one of these approaches to simplifying your repayment effort.
Let’s take a look at student loan consolidation versus refinancing.
Consolidation — Applies More to Federal Loans
Using this strategy, you can combine all of your outstanding loans into one, which reduces the complexity of repaying them. Rather than dealing with a lot of different monthly statements, payments and infrastructure, you’ll have a single loan to manage.
However, the government affords you no financial advantage for doing so. Your interest rate will reflect the rated average of all of the current ones in place. On the other hand, all of the advantages of federal loans do remain intact. These include income-driven repayment, deferment and Public Service Loan Forgiveness (PSLF).
A Direct Consolidation Loan is the mechanism by which this is accomplished.
Refinancing — Applies More to Private Loans
This is the approach by which private student loans are consolidated. Under this form of debt consolidation, multiple student loans are replaced with a single new one with the goal of getting a lower interest rate.
Remember, consolidating federal loans won’t result in an interest rate reduction. It’s more about convenience than savings. In fact, it can mean a higher overall rate in some instances.
Experts say student loan refinancing is better thought of as optimizing your loans — rather than refinancing them. After all, your goal should be to pay less overall. Your total repayment amount could well be lower than you’d manage paying each of your loans separately if you can combine all of them into one at a lower interest rate.
Federal Loans Can Be Refinanced
Now, with all of that said, you can also refinance federal student loans through private lenders. You’ll take advantage of the same interest rate reductions, which could mean paying less overall if you get advantageous terms too.
However, the moment you convert your federal loans into a private loan, you’ll forfeit all of the perks that come along with federal loans — again, those include income-driven repayment, deferment and PSLF.
Predicting the future is something humankind has yet to perfect. Converting federal loans to private, in an effort to save money on interest, opens you to the risk of running into a rough patch without the protections federal loans afford.
On the other hand, you do have the potential to save a lot of money too, so the choice does bear some consideration.
So, Should You Do Either One?
All in all, the risks are minimal with federal consolidations. You won’t save any money, but you will make things easier to manage. Plus, you’ll maintain the protections federal loans afford you. By the way, there is no going back if you convert federal loans to a private one.
Weigh that decision rather carefully.
If you already have private loans, refinancing is something of a no-brainer, as long as you make sure you’re getting a lower interest rate — without extending the term of your longest loan. This is the best way to garner the savings. Also keep in mind, you’ll run into processing fees and application fees. Make it a point to run the numbers to be sure you’ll realize worthwhile benefits.
Federal loan consolidation is free of charge.
One more thing regarding student loan consolidation vs. refinancing: Be very careful to avoid getting taken by nefarious individuals who look to prey upon those who need these services.