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Student Loan Refinance & Consolidation

Updated December 12, 2019

 

When entering college, most student loan applicants are treated equally as far as interest rate and repayment terms. Once you’ve graduated and established yourself in the financial world, you should have built some responsible financial habits. We mean you pay your bills on time, pay over the minimum amount on your student loans, and overall don’t put yourself in risky financial situations.

 

All of these things help to improve your credit and make you better eligible for refinancing or consolidating your student debt. Refinancing or consolidating your student loans could bring you substantial savings on your student loan debt – but how do you know what’s best for you? What’s the difference? This is a common question, so let’s take a look at the benefits of each.

 

Student Loan Debt Consolidation

Consolidation is taking multiple loans and combining them into one. This provides one easy and simple payment instead of having multiple different payments due for each loan. When consolidating your student loan debt it’s common for borrowers to extend the life of their loan to have a lower monthly payment. Be cautious though this may look like an attractive and smart idea you may end up paying longer over the entire life of the loan. Typically, when consolidating you can lose out on benefits like principle rebates or loan cancellation, because you’re using a different lender.

 

If loans with different interest rates are being consolidated what interest rate does that leave you with? When you consolidate multiple loans together the interest rates will change. Lenders will use the weighted average of all your interest rates. The term of the repayment can also change. Be aware that there are federal student loan consolidations and private student loan consolidations.

 

Federal Consolidation

Private loans are not eligible for consolidation through the government. It’s important to note here that once you consolidate your student loans through the federal government they cannot be reconsolidated through the federal government again unless an additional loan has been added.  To qualify for federal student loans you must meet the below criteria:

  • Leave school, graduate, or become a part-time student
  • Have the loan types listed here to qualify
  • Loans must be in repayment or in the grace period

 

Consolidating your federal loans can lower your monthly payment, you may have access to Income-Based Repayment depending on the type of loans you have, and variable-rate loans can be switched to fixed interest rate loans or the weighted average of the interest rates on loans being consolidated, rounded to the nearest one-eighth of one percent.  Now that we understand what federal student loan consolidation is like, let’s review private student loan consolidation.

 

Private Student Loan Debt Consolidation

Private lender requirements will vary based on the lenders available. It’s important to understand that private lenders will have different ways to qualify borrowers. You may be approved for consolidation with one company and not with another. When you are looking for private consolidation on your loans take into consideration the ability to refinance. When you refinance with a private lender there are multiple benefits.

 

Refinancing Student Loan Debt

Refinancing is combining multiple student loans into one, similar to consolidation – However, unlike Direct Loan Consolidation, this option is only offered by private lenders and includes the consolidation of both federal and private student loans. You can pick and choose which loans you want to refinance and which loans not to include. Student loan refinancing can reward borrowers who demonstrate responsible financial habits with rates and payment options not offered through the federal consolidation program. New interest rates are calculated based on the borrower’s credit history and overall financial health, as well as current financial market conditions, rather than the weighted average of the included loans. Before considering refinancing your student loan debt you want to make sure you have a steady and favorable income, a good credit score, and a good debt to income ratio. Feel free to check out ELFI’s eligibility requirements to get an idea of the criteria you’ll need to meet to refinance.

 

Be aware that if you’re seeking Public Service Student Loan Forgiveness, if you refinance with a private lender you will be losing that ability, as well as other benefits associated with the federal student loan program, such as income-based repayment plans and certain deferment and forbearance abilities. Don’t think that as a borrower you need to choose between refinancing with a private lender and federal student loan consolidation. You can pick and choose what loans to consolidate and which loans to refinance based on your unique situation.

 

9 Questions to Ask During the Refinancing Process

 

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