Now that you’re a few years out of college and getting settled into your chosen career, you may start feeling the drudgery that is your student loan debt. Every month the money comes out, but the balance seems to barely move. Depending on where you attended college, your major, and what type of degree you earned, you could owe anywhere from a few thousand dollars to hundreds of thousands. Many college graduates find their student loan debt holding them back from achieving their goals in life, such as marriage, children, owning their home, starting a business, or maybe just buying their ideal vehicle. It’s at this point a borrower might consider their options: consolidate their student loans or refinance.
Deciding whether you should consolidate or refinance your student loans is an important choice that could save you tens of thousands of dollars. To make the best decision for your finances, you need to be informed. Both options have benefits, but one may be better for you depending on where you are in your repayment process, your goals for repaying your student loans and what you want to make your priority.
Here are some things to keep in mind when considering a consolidation or refinance of your student loans:
To make the best decision, you have to start by knowing exactly what it means to consolidate or refinance
A Federal student loan consolidation is a process which combines your various separate federal student loans into one new federal student loan, called a Direct Consolidation Loan. With this option, only your federal student loans are eligible, not the private student loans like those through a bank or credit union.
Most federal student loans are eligible for a Direct Loan Consolidation. These would include: Direct Subsidized Stafford Loans, Direct Unsubsidized Stafford Loans, Direct PLUS Loans, Federal Direct Consolidation Loans and Federal Family Education Loans (FFEL).
On the other hand, refinancing a student loan combines your existing student loans, federal or private, into a new student loan with a lower interest rate. Through refinancing, you have the chance to save money with a lower interest rate, allowing you to possibly pay off your loans faster.
On the back end, when you refinance, a lender pays off your old loans and replaces them with a new loan you borrow through them. The obvious benefit of refinancing is that both federal and private loans are eligible.
When you consolidate multiple federal student loans with different interest rates, your rate doesn’t simply increase or decrease. Instead, a weighted average of your existing interest rates are rounded up to the nearest 1/8%.
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If a lower interest rate is the most important thing to you, refinancing may be a better option. Student loan refinancing interest rates have been trending low recently. With a good credit score and consistent income, you may be able to qualify for a much lower interest rate which would save you thousands, even tens of thousands, in the long run. Refinancing also gives you the option of a fixed or variable interest rate and a wide range of loan repayment terms, from five years up to 20.
The least enjoyable part of a student loan is the repayment. If you are looking to consolidate, your loan type makes a difference as federal student loans and private student loans offer different options.
The standard repayment term for a federal student loan is 10 years. If you find yourself struggling to repay a federal student loan, an income-driven repayment plan could lower your payments depending on your discretionary income. If you are interested in an income-driven repayment plan, check into an income-based repayment (IBR) or a Revised Pay As You Earn (REPAYE) plan. You can also qualify for student loan forgiveness on your remaining balance after 20 to 25 years, but you would still be responsible for any income tax on the amount forgiven.
If you choose to refinance your student loans, you will likely have more options in your repayment terms. Most student loan refinancing lenders offer repayment periods over 5, 7, 10, 15 or 20 years. If you want to pay your loan off faster and save yourself years of interest payments, consider choosing a shorter repayment term. While the monthly payment will be higher, you will save more in the long run, especially with the lower interest rates most refinancing lenders offer.
Should you consolidate your student loans?
There are a couple of reasons to go with a consolidation of your student loans. With a Direct Consolidation Loan, your loan payments will be organized and simplified into one monthly payment. It also offers the chance to take advantage of an income-driven repayment plan. Plus, there are certain benefits associated with consolidating a federal student loan, such as deferment and forbearance.
Should you refinance your student loan?
Like a Direct Consolidation Loan, refinancing can simplify your financial life into a single monthly payment through one loan service. And one of the more appealing aspects of refinancing a student loan is the lower interest rate.
If you are most interested in a low interest rate so you can save money, want to pay your loans off faster, and want the option of a fixed or variable interest rate, refinancing may be the choice for you.
Which is better?
Both options offer benefits that the other doesn’t and either option will work better for you depending on your financial lifestyle and financial goals. If you want the benefits of federal repayment plans and better organization of your financial life, look into consolidation. If you are looking to save yourself the most money through lower interest rates and paying your loan off faster, you might lean towards refinancing.
For a quick estimate of your potential savings and repayment options, use a student loan refinancing calculator or talk with a student loan refinance lender. As you research which option is better for you, remember that you are not stuck in the mud with your student loans and you will be able to be rid of them one day.