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The Difference in Refinancing or Consolidating Student Loans

If you financed your education, you probably walked away with several loans, multiple interest rates, and a hefty debt. 

Regardless of the amount you borrowed, if your repayment plan doesn’t work for you, you may have the option to consolidate or refinance your loans. 

How it Works
Student loans are either federally or privately funded. Federally funded loans are eligible for consolidation and refinancing while privately funded loans are eligible for refinancing only. Both take multiple loans and interest rates down to one loan and one rate. They can also significantly reduce your monthly payment by extending the terms of the loan from ten to 20 years or more.

Federal loans are consolidated through the Department of Education. A new interest rate is calculated by averaging your multiple loan rates. Your credit score does not play a factor in your rate. Federal loans also offer different options for repayment such as extended terms or income-driven repayment. 

Since refinancing is through a private lender, it is subject to credit approval, among other requirements. If you are refinancing and your credit is good, you may be eligible to secure a lower interest rate than what you were paying, which saves you money over time. 

Payments decrease when the interest rate is reduced, but also when payment terms are extended. Keep in mind when extended, you will repay more because the interest on the loan accrues over a longer time, such as 20 years vs. ten years. 

If you find you have a mix of private and federal student loans, you may finance your federal loans into your private loan to consolidate the two. Beware you may roll a lower federal interest rate into a higher private loan interest rate as private rates tend to be higher than federal rates. 

If the thought of repaying more over time is not attractive, but refinancing or consolidating is your best option, you can minimize your costs in the long run by making an effort to pay more than your minimum monthly payment. Adding extra money could significantly reduce your repayment period and the accrued interest by chipping away at the balance much quicker.   

Source: Credit Donkey