Personal Finance

Student Loan Consolidation vs. Refinance

Written by Miranda Marquit

Once you’ve walked across the stage and received your diploma, it’s time to start thinking about how you are going to repay your student loans. There is a six month grace period for most student loans, and during that time, you need to figure out whether you want to consolidate or refinance your college debt.

This is an important decision because keeping all of your student loans separate can be confusing and frustrating. Each year that you’ve been in school represents different student loans, so it’s possible that you will be asked to make anywhere between two and six payments a month, depending on your loan structure. That can be a drain on your monthly cash flow, and be difficult to keep track of.

Consolidating or refinancing your student loans can help you better manage your payments and stay on top of the situation. Plus, it might even mean lower monthly payments and lower costs overall.

Student Loan Consolidation

If you have federal student loans, you can consolidate them. This means that they are effectively bundled together. You make one payment, and that payment is divided up among the loans you have. When you consolidate your federal student loans, an average of the interest rates on your loan is used to determine what you will pay overall.

Most federal student loan consolidation plans allow you to extend your repayment term from 10 years to 25 years. This can result in lower monthly payments, improving your cash flow situation, and making your loans more affordable. Lengthening your term, though, can also sometimes mean that you end up paying more money overall, depending on your monthly payments and your interest rate.

Another advantage to federal student loan consolidation is the fact that you can take advantage of the government’s income-based repayment and other repayment programs. With income-based repayment, you are only responsible for a certain percentage of your monthly income each month. After a set period of time, any remaining balance is forgiven. The downside to this is that the forgiven amount might be considered income on your taxes and result in a larger bill.

You might also have access to a 10-year forgiveness option if you go into certain civil service jobs or jobs teaching underserved populations.

Student Loan Refinance

A consolidation merely puts all of your student loans in one place. Only federal loans are eligible for federal consolidation. If you have private loans, you might want to take advantage of a refinance option.

Student loan refinance involves getting a new loan that is large enough to pay off your existing student loans. These can be private loans or federal loans. When you refinance a student loan, your interest rate is based on your credit. If you have good credit and can prove ability to pay, you might qualify for an interest rate that is much lower than the federal rate for student loans. This can save you money on monthly payments and even save you money on your total repayment over time, depending on the term length chosen.

The main downside to a student loan refinance is that you can lose some of your federal protections (like income-based repayment) if you decide to include federal loans in your refinance. Additionally, it might be harder to arrange deferrals and forbearance with private refinance. Since the government doesn’t offer refinancing at this time, if you go this route, you will have to choose a private provider.

Should You Choose Consolidation or Refinance?

Consider your situation before deciding which way to go with your student loans. If you have a lower income, and you are concerned about monthly cash flow, federal consolidation can make a lot of sense. On the other hand, many professionals with the potential for high income and who don’t qualify for income-based plans, it might make more sense to refinance to take advantage of the lower interest rates.

It’s worth noting that you can employ a combination of tactics. You can consolidate your federal loans, and then, separately, refinance your private loans if you have a mix of federal and private college debt. Later, if you end up off income-based repayment and want to pay down your debt faster, you can choose to refinance even your federal debt.

Research the risks and rewards of each type, and decide whether consolidation, refinance, or a combination of both is right for you.

About the author

Miranda Marquit

Miranda is a freelance journalist specializing in topics related to personal finance, investing, entrepreneurship, and small business. Since receiving her M.A. in Journalism from Syracuse University, her work has appeared on a number of web sites including Wise Bread, U.S. News & World Report, Forbes, AllBusiness, and Huffington Post. She writes for the Equifax blog and the Quizzle blog, and has written extensively about credit, retirement, insurance, and taxes for a number of other corporate blogs and web sites. Follow Miranda on Twitter, @MMarquit, and check out her personal finance blog, Planting Money Seeds.

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