While in school, you may not think too much about your loans and how you’ll pay them later. Yet, when you leave school and repayments start, it can be overwhelming. There are numerous opportunities for individuals to restructure their loans to make it easier to repay what they owe. However, the type of loan you have can play a role in the availability of these programs.
What is Student Loan Consolidation?
Student loan consolidating is the process of wrapping together all of your student loans into one single payment. Federal student loan consolidation, though, comes with a considerable difference from refinancing in that you’ll be able to maintain the same protections and benefits that typically come from federal student loans and not private loans.
Consolidation will allow you to:
- Refinance only your federal student loans together (you cannot lump in private student loans).
- Secure a single, new interest rate (it could be higher or lower depending on market circumstances).
- Set up fixed payments, so your payment remains the same.
- Extend the loan terms to give you more time to repay the loan, thus lowering your monthly payment.
What is Student Loan Refinancing?
Student loan refinancing is obtaining a new loan to pay off the existing loans. That may sound the same, but there are some significant differences. If you have private and federal student loans, you can refinance them together for a single new loan to pay back. However, you lose any federal loan protections you have.
Some of the reasons you may consider refinancing student loans include:
- Your monthly payment may be lower because you can stretch out your repayment terms.
- You can speed up repayment if you have a lower interest rate on this new loan, which means less cost to repay.
- A fixed monthly payment is possible in most cases.
- It’s easier to make payments on one loan than over several, which could help protect your credit score moving forward.
Comparing Consolidation and Refinancing
Which path is best for you? That depends on your situation. Here are some key things to consider.
- You only have federal student loans. In this situation, consolidation is best because it allows you to maintain your federal student loan benefits.
- You have private and federal student loans, with higher interest rates on some, and want to lower your total monthly payment. In this case, refinancing works the best.
- You want a lower interest rate. Typically, the interest rate on all federal loans, including consolidation loans, will not be lower overall. However, refinancing could mean you secure a lower rate if one is available.
Both of these options will help you have just one monthly payment. You can increase the borrowing term to stretch out your payments in both cases. Hence, your monthly payment is lower and more affordable.
How to Consolidate Your Student Loans
If you have decided you want to consolidate your student loans, there are a few steps you’ll need to take to do that. First, you can typically use the Federal Student Aid website to complete an application for loan consolidation of federal loans through the formal consolidation program. That is the most straightforward process for you, allowing you to consolidate multiple loans into one without any added cost.
The entire process is done online through the portal. You may immediately learn if you qualify and what you can expect to be available.
If you want to consolidate your loans like this, the process does not require the help of a professional. You can do it yourself online.
How to Refinance Your Student Loans
Refinancing is different. You’ll likely be working with a third-party lender outside the federal government. That’s not necessarily bad, but it means all of the benefits of having federal student loans (like forbearance and even forgiveness) may not apply to you down the road.
However, refinancing offers many consumers key advantages and should be considered. The key here, then, is to make sure you get the best offer from lenders:
- Ensure your credit report is in good shape and you do all you can to keep your credit score up before applying.
- Compare several lenders to determine who offers the best rate. There could be a lot of differences between lenders here.
- Once you consider your options, complete an application and await approval.
If your loan is approved, the lender will proceed with the payout to cover the existing cost of your loans directly to the lender and set up the new repayment terms with you.
Seeking Professional Help
Because student loans tend to be significant, working with a professional to ensure you make the right decision here is helpful. Turn to a financial advisor or debt counselor who can help you to explore the numerous repayment options available to you and to learn which avenue may be best.
The key to remember here is that you may have numerous options for getting your loans under control again. Since bankruptcy isn’t an option with these loans, you’ll want to consider these avenues.