Refinancing or Consolidating Student Loans: How it all works

If you financed your education, you probably walked away with several loans, multiple interest rates, and a hefty debt. Student loans ultimately helped you get the job you wanted, but now paying them back might be weighing you down.

Regardless of the amount you borrowed, if your repayment plan doesn’t work for you, you have the option to consolidate or refinance to work out a better payment arrangement.

Student loans are either federally or privately funded. Federally funded loans are eligible for consolidation while privately funded loans are eligible for refinance. Both take multiple loans and interest rates down to one loan and one rate. They also significantly reduce your monthly payment by extending the terms of the loan from 10 to 20 years.

Loan consolidation is done through the Department of Education. The new interest rate is calculated by averaging your multiple loan rates. Your credit score does not play a factor in your rate. Refinancing is done by a private lender and 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 which saves you money over time.

While cutting your monthly payments in half is a tremendous financial relief, there is still a price to pay. Payments are reduced because the terms of repayment are doubled. That also means you may repay more because the interest on the loan is accrued over 20 years vs. 10 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 add a little to your minimum monthly payment. Adding extra money could significantly reduce your repayment period and what you repay in interest by chipping away at the balance much quicker.

Source: Credit Donkey

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