Select Page

An estimated 40 million Americans hold some form of student loan debt, with over 70 percent of individuals earning a bachelor’s degree accumulating debt before they even graduate. This staggering number can leave a person powerless as they graduate from school already owing a significant amount of money. Oftentimes, students get locked into a high interest rate that makes payback virtually impossible. The loan may not have to be paid back until graduation, but the amount you’ll eventually be coughing up is almost too difficult to bear.

Consolidation and refinancing can help your loans become less daunting and more affordable. You might be curious to know which option is the right choice for you. Because there are significant differences between consolidating and refinancing, it’s important to know what both mean before choosing your strategy.

Refinancing Your Loans

Refinancing refers to taking out a brand new loan to pay off older ones that you’re holding. You do not consolidate what you already owe, but just switch the amount over to a different lender. If your credit score has improved since first taking out the initial loan, you may qualify for lower interest rate options. Look for interest rates that fall between the 3 to 5 percent range, which will lower your monthly payments further.

The whole point of refinancing your student loans is to lower payment dues, shorten your loan term and save money on interest. For those still struggling with bad credit, you can lengthen the term of the contract as well, lowering payments because you have more time to pay it off. Refinancing enables you to choose a variable loan rate, too, which can help lock you into an agreement you’ll find affordable and worthwhile.

With refinancing, you enjoy the benefit of consolidation, where you have one easy-to-manage monthly bill. You can lump a number of loans onto one, making it easier to manage your finances and get yourself back on track monetarily. Unlike consolidation, student loan refinancing can only be obtained through private lenders. You’ll need to go to banks or loan departments in order to begin the process.

Consolidating Student Loans

Consolidating your loans means to lump them all into one large sum, providing you with one monthly bill that makes it easier to pay off. Federal loan consolidation is provided by the Federal Government for all student loans obtained through this method. If you took out a private loan through a bank, you will not qualify for federal loan consolidation. Consolidating with the Federal Government will take all older loans and put them onto one convenient bill, but your interest rate will be comparable to your old one.

Many find consolidation to help with lowering their monthly bills, but the only reason for this is because you’re lengthening your term. Let’s say that you only had five years to pay off your old loans and you choose to consolidate. You may now have 10 or more years of loan payments, but your bills will be lower as a result. This is ideal for individuals struggling to make ends meet and who don’t mind a longer term as long as payments are more affordable, but it can hurt you financially long-term.

Just because you have a private student loan does not mean that you aren’t able to consolidate. Most private lenders will offer student loan consolidation at variable rates. The only difference between the Federal Government and a private lender, like a bank, is that your credit score will be a deciding factor. If you have a poor score or no credit at all, don’t expect to be approved for consolidation and, if you are, you’ll be locked into a high interest rate.

Knowing What’s Best for You

You need to weigh out the good with the bad when choosing between refinancing and consolidation. Both options help to lower monthly bills and make suffocating student loans more bearable, but they also have their drawbacks. Longer terms, higher interest rates and refinance denial are all factors to consider before signing on the dotted line. If your student loans are five years or older, you could benefit from either option just because of the change in interest rates over the years.