Consolidating student loans. Refinancing

    • Consolidating federal loans is the only way to do it; private student loans are not allowed.
    • Refinancing student loan may result in a lower interest rate than the original terms.
    • Refinancing federal loans with a private lender can cause you to lose key borrower protections.
    • Find out more about Insider’s coverage of student loans here.

    It can be difficult to understand the difference between refinancing and loan consolidation. This is especially true when people use them interchangeably. These are two processes and may not be the best for you.

    What is student loan consolidation?

    Consolidationnow consolidation loans allow you to consolidate multiple federal loans or combine them into one loan. Consolidating federal loans is free. It is a red flag if a private company offers help and asks for a fee. Consolidating student loans doesn’t require credit checks.

    Consolidating student loans won’t help you save money, but it doesn’t mean that you can’t get the benefits. Consolidating your student loans will allow you to make fewer monthly payments and you can get a new loan manager if you are unhappy with the one you have.

    Consolidating loans other than direct loans may make you eligible for income-tested repayment plans or loan forgiveness. Consolidating loans that are not direct loans can allow you to keep these benefits.

    Consolidating federal variable rate loans, which were last disbursed in 2006, will allow you switch to fixed rate loans. A longer repayment term can reduce monthly payments, but it will result in higher interest rates overall.

    Consolidating your loans means that any unpaid interest will be added to the principal balance of the new loan. The result is that interest may accumulate on a greater principal balance than if the loans were not consolidated.

    What is student loan refinancing?

    Refinance student loans to get a lower interest rate. Private lenders might offer better terms depending on your financial situation. A credit check is required to refinance a student loan. Rates will be determined based on that credit.

    Refinances can be made to switch between a fixed-rate loan and an adjustable rate loan. This can help you get a lower rate. Variable rate loans are subject to fluctuation, so you might end up paying a higher interest rate than if your rate was fixed.

    Refinancing federal student loans should be done with caution. All current and future government protections, including COVID-19 loan forgiveness and loan forbearance (currently in effect until January 31, 2022), will be lost. For the public service.

    Also, you will not be eligible to income-based repayment plans. These take into consideration your income and family size in determining monthly payments. They also protect you in case of loss. Job loss. These benefits may not be worth the savings you make on interest.

    Refinancing student loans privately is possible with almost no risk. Refinance fees are rarely charged and you might be eligible for lower rates if you have a better credit score than you had before you received your original loan.

    You have to be able to decide between consolidating or refinancing your loans.

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