Deciding whether to refinance or to consolidate your student loan is an important decision but before you commit to what you will do, it is important to understand what the difference between these two is. Both of these options are good for you and it depends on your understanding of them. When you choose to consolidate your debt it means that you are bundling your several federal loans into a new single loan so that you can pay them all as a single obligation or find alternative government programs that you may qualify for. Student refinancing on the other hand is used when you want to save money because it involves you replacing an existing federal or private loan with a new one that has a lower interest rate.
A federal student loan consolidation is a government procedure so it needs to be done on a designated government website. Before you go through with the consolidation process, it’s important to know that it also has advantages and disadvantages. A notable advantage is how it makes it easier to pay off your debt because it provides you with more time and lowers your interest rates meaning that it is the ideal option for parents who do not earn a high income. A disadvantage though is that you may not be able to save money because the longer your repayment term is, the more interest is accumulated on your debt. You also run the risk of giving up your federal loan benefits. But this can be the best option for you if you have many federal loans and you feel that you are stretching yourself too thin or you do not qualify for a federal program and if you are trying to change your federal loan servicer.
Private loan consolidation is considered the better option when compared to private refinancing. If you already have a student loan and wish to refinance it is important to understand how it can benefit you. If you opt to refinance your federal student loan then you will lose your income-driven plans as well as your loan forgiveness programs but you will be able to save money if you have a high-interest loan. You do have the option to only refinance a portion of your student loans as a way to keep some of your federal protections. Having to reduce your monthly payments helps to lower your interest rates which lessen the repayment term on your loan.
Most people use consolidation and refinancing interchangeably because of their similarities but these are two distinct processes to improve your principal debt amount. So, understand how they differ before making your decision on whether to consolidate or to refinance your federal or private student loan.