When it comes to student loan refinancing, the words consolidation and refinancing are often used interchangeably. But in reality they are not the same, each one describes a completely different loan process. Due to the differences, you may find yourself going in one direction or another. You can even decide that the best action is inaction (in fact it is possible!).
Let’s take a close look at why that is true.
Fast and easy student loan consolidation
Referred to as a direct consolidation loan, consolidation is a government program in which you can combine several federal student loans into a single loan with a single monthly payment.
The interest rate of the consolidation loan is calculated by a weighted average of the rates of the loans that are being consolidated. For this reason, consolidation does not usually result in saving money, mainly for the convenience of having a single monthly payment. That is why they are considered consolidation loans, rather than refinancing in the traditional sense.
It also means that the new loan is likely to have a monthly payment equivalent to the combined payments on your current student loans. However, you can decrease the monthly payment by extending the term of the consolidation loan so that the new payment is lower and more affordable. But as the term increases, interest will be charged for a longer period of time, which will result in you paying more for the total loan.
A great advantage to direct student loan consolidations is that you do not need good credit to qualify for the loan. Because it is a federal government loan that only combines existing loans, you will still be eligible for consolidation even with fair or deficient credit.
You can consolidate your student loans through https://dedebt.com/consolidation-loans/best-student-loan/.
Student Loan Refinancing
Student loan refinancing is offered by private (non-governmental) lenders. You can use them to consolidate and refinance federal student loans and private student loans. Although they offer the opportunity to consolidate several student loans into a single loan, they also offer the opportunity to reduce your interest rate compared to the average rate you are paying on several student loans at this time. And that, of course, can also result in a lower monthly payment, even without increasing the term of the loans you are currently paying.
However, the disadvantage is that you will receive qualified credit for a refinancing of student loans, which means that your rate will be determined by your creditworthiness as a borrower. That will include a combination of factors, including credit history, income, work history and debt/income ratio (DTI). Your interest rate may be higher than it is in the weighted average of your current student loan debts if your credit profile is considered less than optimal.
Student loan refinancing lenders
There are several private sources that you can use to refinance your student loan debts. You can try your own bank or banks in your area, but you should keep in mind that most banks do not make this type of loan. However, there are several lenders that handle student loan refinancing nationwide.
Two of the most popular student loan refinancing companies are BondingLoan and Shaffi-Credit.
BondingLoan is a web-based crowdfunding platform that specializes in providing and refinancing student loan debt. You can borrow up to $ 220,000 and have very attractive interest rates. However, there is a limitation: you must be a graduate student to use the loan program. In that sense, BondingLoan will finance the cost of your graduate education and also allow you to refinance the student loan debt accumulated in the pursuit of your undergraduate education.
Shaffi-Credit is perhaps the best known of the web-based student loan refinancing companies. Shaffi-Credit not only offers very attractive prices for its refinancing, in terms of up to 20 years but will also allow you to include all your outstanding student loan debts in the new loan. You must have excellent credit, have a degree and have a solid job. And although Shaffi-Credit offers loans to graduates of a large number of schools, it will not grant credit if you attend or have graduated from a school that is not on your list of eligible institutions.
You can also search several lenders at once with Credible.
Why refinancing may not be right for you
As anxious as you are to refinance your student loans, there are several situations in which this may work against you:
If you have a less than stellar financial profile. Sources of private loans will require you to credit to qualify for a refinance. If your income, credit and work history are where they should be, you will get an advantageous refinancing. However, if your financial profile is fair or poor, you may not be able to refinance at all, much less get a lower interest rate.
Loan rates from private sources cannot be lower than what you are paying now. It is entirely possible that the weighted average interest rates you are paying on your current student loan debts are lower than the best rates that are available now. You may still qualify for a private source consolidation, but that will not reduce your interest rate, or necessarily your monthly payment.
Federal loans have certain benefits if you cannot make your payments. If you are struggling to make your monthly student loan debt payments, federal student loans come with aid programs. One is the Payment Program based on income, or IBR. It covers your monthly payment at a minimum of 10% of your discretionary income and can be written off in just 20 years. Another is the Pay what you earn (PAYE) program, which offers similar relief for the IBR. If you refinance federal loans through a private loan, these relief benefits will be lost.
You are working in a public sector job. The federal government offers its Public Service Loan Relief Program (PSLFP) for federal student loans only. Under the program, you may qualify for forgiveness of the remaining balance of your eligible Federal Direct Loan Program (FDLP) loans after making at least 120 monthly payments while employed full time in an eligible public service occupation. Refinance your federal student loans into a private loan, and that benefit will also disappear.
Private student loan lenders often provide certain assistance benefits, however, they are generally not as generous as those granted with federal student loans. For example, Shaffi-Credit offers an Unemployment Protection program. Under the plan, your loan repayments can be suspended for up to 12 months if you are unemployed for reasons beyond your control. During that time, Shaffi-Credit will provide you with job search assistance.
In most situations, the value of a refinance is primarily its ability to save you money through reduced interest rates or lower monthly payments. But that metric is not entirely reliable when a refinance includes federal student loans. You may find that the benefits you are delivering by replacing a federal loan with a private one will not justify the savings that the refinancing will provide. This is especially true in an economy and labor market that is not as stable as it was before.
Reduce the numbers, no doubt, but make sure you are aware of what you are leaving before including federal student loans in a private source refinancing package.