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    Student Loan Consolidation Vs. Refinancing

    Student Loan Consolidation Vs. Refinancing

    Outstanding student loans are a significant financial issue in the United States, with more than 44 million Americans carrying a cumulative educational debt load of approximately $1.5 trillion. 

    The cost of servicing the loans taken out to cover your college tuition can eat into your budget for years or even decades unless you take decisive action to reduce and finally pay down the amount you owe.

    Let’s begin by distinguishing between the two most common types of debt reduction strategies: student loan consolidation vs. refinancing.

    Loan Consolidation Vs. Refinancing - Know The Difference 

    Having several smaller student debts, each with its interest rates and associated fees, can make it incredibly challenging to retire your outstanding balances. 

    Loan consolidation and refinancing involve replacing several smaller debts with one large lending product — preferably with a fixed interest rate and more manageable repayment terms. There are several differences between these two approaches and their associated financial products that should be on your radar. 

    • A government agency carries out federal student debt consolidation, and as a result, only federal student loans are eligible. Your new APR will be equal to the weighted average of your existing debt rounded up by 1/8 of a percent. This differs from the standard type of consolidation provided by lenders to help credit card and vehicle finance customers amalgamate and pay down their balances even though the two products share the same name
    • Student loan refinancing also involves combining multiple debts into one super loan, but unlike a consolidation product, it typically has a lower interest rate and easy repayment terms. Both private and federal student debts are eligible for refinancing, but it’s important to note that you may lose several benefits if you choose to pay down your government-backed financing using this method

    Student Loan Consolidation  

    As mentioned above, there’s a distinct difference between consolidation lending for consumer debt and student debt.

    • Student loan refinancing isn’t typically one of the approved uses for unsecured personal lending. As a result, the usual consolidation lending options you’ll see advertised may not apply to college debt unless it was privately financed in the first place
    • When you opt to consolidate your education’s federal debt, you’ll need to apply for one of several federal programs that are specifically designed to help make your repayments more affordable. You may also want to consider student loan rehabilitation programs as an alternative or complementary solution

    Read more about this option in the sections below.

    How To Choose The Best Lender For Student Loan Consolidation? 

    When choosing a lender, it’s essential to access the company’s student loan consolidation options and ensure that the option you choose will allow you to achieve your debt management objectives.

    You’ll want to look out for the following features that every suitable consolidation lender should offer. 

    • Reasonable APRs: This will help prevent an increase in your borrowing costs
    • Sufficiently long terms: Lengthening the repayment time on your student debt will reduce your monthly payments, but it’ll also mean that retiring the debt will take longer 
    • Generous maximum amounts: The total value of your new financing needs to be equal to the sum of your outstanding student debts. It’s essential to ensure that you qualify for an appropriately-sized amount before you proceed with consolidation

    Recommended Student Loan Refinance Options

    • Financial planning
    • Low interest rates
    • Career coaching
    • No prepayment fee
    • Cashback checking
    • Building credit history
    • No Origination fee

    Student Loan Refinancing 

    Opting to refinance your college debt is an excellent opportunity to save on your monthly installments by securing a more favorable APR. The strategy is mostly applicable for applicants whose credit scores have increased substantially since they took out their original financing.

    • It’s worth emphasizing that the primary purpose of debt refinancing (as opposed to consolidation) is to secure a better interest rate and lower associated fees on your new loan
    • The easiest way to ensure that this is the case is to calculate your total monthly repayments by adding up the individual payments on your smaller debts before comparing this amount to the projected monthly repayment for your new lending product

    As you research your funding options, you’ll want to keep the following important criteria in mind.

    Terms Of Refinancing

    Stated simply, the main objective of choosing to refinance your debt is to get a better deal. You’ll know whether this is the case by studying the following terms and conditions associated with the lending product you’re assessing. 

    • Lower interest rates: This may be the most critical consideration when it comes to lending terms. The rate a lender offers is directly related to your creditworthiness and income situation. With good credit, you could save a substantial amount by securing a lower APR
    • Reduced fees: Lenders charge a variety of fees at every step of the underwriting process. By choosing a refinancing provider that charges low initial and recurring fees, you could save a substantial amount over the life of your new loan
    • Repayment period: A loan of the same value will be more affordable every month if you have longer to pay it down. If you intend to make your student debt less burdensome on your monthly budget, you may want to give yourself longer to pay it down, even if it means taking longer to reduce your debt entirely and more interest paid

    Private Refinancing 

    There are various lending providers in the refinancing industry offering a range of lending solutions that may suit your needs. Here are some of the benefits of choosing this type of product.

    • Flexibility: Private lenders may be more likely to accept applications from customers with less than perfect credit or college graduates who currently find themselves without permanent employment due to the COVID-19 pandemic
    • Innovation: Many private debt refinancing companies use cutting edge technology to assess potential borrowers’ risk and rely less on traditional metrics like FICO scores. They usually offer online applications with quick lending decisions that take as little as 24 hours

    Bank Refinancing

    This is the most traditional route so you can take to refinance your educational borrowings. Approaching your bank may be beneficial if you have a long track record with the institution and tend to make your credit card, mortgage, and other credit card payments on time and in full. 

    If your credit score and income situation are less than ideal, you may want to think twice before applying for bank refinancing. Large mainstream lenders tend to have stringent eligibility criteria that often rule out applicants with weaker creditworthiness. 

    How To Choose The Best Lender for Student Loan Refinancing?

    Choosing from a large number of lenders in the market can seem daunting. Still, if you compare prospective providers with the following criteria in mind, you’ll soon narrow your choice to a handful of suitable options. 

    • Better terms than your current loans: Your new lender will need to offer you a lower APR and give you the option of extending your repayment period
    • Open to bad credit applicants: You’ll want to work with a lender that understands your current financial situation and doesn’t exclude you based on creditworthiness
    • Easy application process: Online lenders are usually the best choice if you’d like to refinance quickly

    Student Loan Consolidation Vs. Refinancing - Comparison 

    Student Loan Consolidation        

    Student Loan Refinancing

    How does it work?

    Your smaller debts are combined into one large loan with an APR calculated as a weighted average

    The large loan that replaces your small student debts should have a lower APR and better lending terms

    Available for private loans?



    Available for federal loans?



    Will I have one monthly payment?



    Can I have a cosigner?



    Can I keep my other federal benefits?



    Is there a credit score limitation?



    Do I need a stable income?



    Will my interest rate be lower?


    Yes, ideally

    Will it help me to lower my monthly expenses?



    Will it help me to pay off the loan faster?


    Yes, if you select a similar loan term

    When We Recommend To Consolidate

    Consolidation is best suited to student debt owners who initially financed their education using a set of government-backed loans. You’ll want to choose this option in the following situations.

    You Hold A Federal Loan

    These lending products often come with lower interest rates and a raft of federal benefits that you may not want to give up. It’s probably in your best interest to first explore government consolidation programs before privately refinancing your student debt. 

    You’re Tired Of Tracking Multiple Payments 

    The more individual payments you have to make each month, the more likely you’ll skip one and suffer the consequences in the form of a lower credit score. A consolidated debt will help you manage your installments by requiring you to make a single monthly payment, often with an autopay option. 

    You’d Like To Extend Your Repayment Period 

    If your monthly payment is stretching your budget excessively, you may want to consolidate and opt for a longer loan term (up to a maximum of ten years). This will lower your monthly repayment amount but also increase the overall cost of your debt.

    When We Recommend To Refinance 

    This option is ideal for borrowers who’d like to combine their debts into a single, more affordable lending solution. The following circumstances may suggest that you’re a prime candidate for this type of financing product. 

    You Hold A Private Loan

    Privately financed educational borrowing tends to be more expensive than most government-guaranteed loans due to the higher interest rates involved. Since you aren’t entitled to federal benefits, you’ll want to give yourself the advantage of a lower interest rate and more flexible repayment terms by refinancing. 

    Your Credit Score Has Improved Since Graduation

    The APR your lender charges is determined to a large extent by your FICO score. If your numbers have been gradually ticking up since your college days, you could qualify for a new loan with lower monthly costs and save hundreds or even thousands of dollars in the long term. 

    You’d Like To Pay Down Your Debt And Build Your Creditworthiness

    If your current student debt lenders don’t report your payment activity to the three major credit bureaus, your on-time payments may not be having a positive impact on your credit score. Refinancing with a lender that reports to Experian, Equifax and TransUnion could help you boost your score while you retire your college debt. 

    Bottom Line 

    Choosing whether to consolidate vs. refinance could be the single most crucial decision you make concerning your student debt. The strategies outlined above will give you an edge as you assess potential lenders and work toward paying down your school debt for good.