It seems like there’s no end to the growing amount of student debt in the United States. There’s only one state—Utah—in the entire nation where the average student borrower owes less than $20,000. In some, it’s approaching $40,00 for the mean outstanding student loan balance.
If you feel like you’re swamped with student loan debt, you’re not alone. Fortunately, there are some options out there to help. Here’s how to decide if student loan consolidation versus refinancing is the better option for you.
What Is Student Loan Refinancing?
Refinancing is one of the most popular money moves for those who want to improve their debt situation. There are some compelling features of a student loan refinance that can make it a solid decision for certain borrowers.
But what is refinancing? When you refinance a loan of any kind, you’re entering into a new lending agreement with the intention of having the new debt totally replace one of your current loans. More simply, refinancing is just taking out a new loan to cancel an old one. This can be hugely beneficial if you have loans with higher interest rates that you want to lower with a new loan.
This might sound too good to be true. As with all things, there are some downsides to refinancing, specifically when dealing with student loans. However, the underlying deal of refinancing student loans is totally legitimate.
What Is Student Loan Consolidation?
Student loan consolidation lives in the same neighborhood as refinancing, just on a different block. Instead of replacing one loan with another, consolidating is where you take several loans and combine them together into a single new loan.
As you can expect, there are pros and cons to consolidation, just as with refinancing. It’s important to understand the similarities and differences between these options before deciding on what’s best for you.
Student Loan Consolidation Versus Refinancing
You’re only going to determine if a student loan refinance or student loan consolidation is the better route for you if you have a strong understanding of their functions and conditions. Here are some of the top differences between student loan consolidation versus refinancing:
- Refinancing can only be done through a private lender – This is one of the most critical pieces of information to know when looking at refinancing versus consolidation for student loans. Unlike most types of loans, most student loans originate with the federal government. While there’s nothing inherently wrong with a private loan, they don’t come with the same level of benefits as federal ones. Federal loans include perks like forbearance and various repayment plans that can help individuals struggling with their debt.
- Consolidation can be private or federal – While refinancing can only happen when you work with a private lender, the same isn’t true for consolidation. It’s possible to get a Direct Consolidation Loan from the federal government, or a consolidated student loan from a private lender. The same issues are going to apply here as with refinancing in terms of keeping or losing federal loan benefits. Furthermore, it’s not possible to consolidate private loans into a federal loan, but it is possible to consolidate federal loans into a private one.
- Federal consolidation doesn’t change your interest rate – Arguably the largest benefit to refinancing—and often consolidation as well—is the ability to lower your interest rates. For student loans, this can only be done with private lenders. When you consolidate with the federal government, it’s possible to lower your monthly payment. This, however, can be a bit of an illusion. Lowering your monthly bill might lead to you paying significantly more over the life of the loan. This is because consolidation with the federal government doesn’t cancel out principal balance or lower your interest rates. It simply combines loans together to simply your payment schedule, while also changing the repayment term. Since student loans are continually accruing interest, paying less each month means you’ll end up owing more in the long run.
There are some critical details to understand when debating between refinancing and consolidating your student loans. Knowing the ins and outs of student loan refinancing versus consolidation can be a huge help in guiding you toward the right choice.