You may be one of the millions and millions of Americans who have a lot of different student loans.
This isn’t that uncommon or even unexpected. When you take out student loans, you typically do it at the beginning of each academic year. You may have a few from each year, and most borrowers go for more than one year.
That doesn’t mean it isn’t annoying and confusing to have a bunch of different loans with different servicers. Plus, these loans may move from servicer to servicer over time.
To simplify things many borrowers consider student loan consolidation or student loan refinance. Both of these options take multiple loans and turn them into one loan. But each is very different and could have huge implications for your future options.
The Major Difference
The major difference between student loan consolidation and student loan refinance is the fact that with loan consolidation your new loan is a federal loan while with refinance your loan is a private loan. This difference has big implications.
The consolidation loan retains all the same federal benefits, including:
- Access to Deferment and Forbearance
- Ability to switch to an Income-Driven Repayment Plans
- Opportunities for Loan Forgiveness
The reason you still have access to these is because you still have a federal loan. With refinancing you are creating a private loan that is owned by a private business, most likely a bank. Private student loans do not have the same benefits as federal student loans.
One misconception about loan consolidation is that it makes your loan “cheaper.” This is not true. The interest rate on your new consolidation loan will be a weighted average of your current loans. This is where refinancing has a leg up. Besides having just one loan to worry about making payments on, the other big advantage is potential to save money through a lower interest rate. In fact, if you aren’t getting a lower interest rate there isn’t much reason to go through with the refinancing.
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One thing that both consolidation and refinancing have in common is this: neither can be “undone.” Once you’ve consolidated or refinanced, you can’t go back.
It’s also worth pointing out that loan consolidation has another potential drawback that I haven’t mentioned yet. Because a new loan is being created, your student loan forgiveness timeline will reset. Meaning, if you were pursuing Public Service Loan Forgiveness and had already made 36 out of 120 required payments on your loans, consolidation will cause you to be back at square one with 0/120 qualified payments having been made. The reason why is because it’s a new loan; you need to make 120 required payments on a loan, and the loans you had been making payments on no longer exist.
Bottom line: make sure you fully understand the implications of consolidation or refinancing before you go through with it.
Where to Consolidate and Refinance your Loans
If you decide that loan consolidation is right for you, you can do so by going to studentloans.gov.
When it comes to student loan refinancing, it can’t hurt to look into what sort of rate quotes you get. I recommend getting rate quotes from multiple companies that offer student loan refinancing. Two companies you can start with is SoFi and Citizens Bank
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really interesting!