Refinancing vs consolidation

Know your payment options

For many with student loan debt, finding the best way to manage payments is a top priority. Two common strategies are refinancing and consolidation. Both have their pros and cons, so it’s important to do your research before making any big moves or decisions. Let’s break it down.  

What’s the big difference? 

You may have heard the terms consolidation and refinancing thrown around—maybe even used interchangeably—but they’re not the same.

Refinancing is like hitting a reset button—you’re taking out a new loan to replace/pay off your existing ones. This new loan usually comes with different terms, like a lower interest rate or a different repayment schedule.

Consolidation is like merging all your existing loans into one new loan with a single interest rate and new repayment plan.

Refinancing: The pros and cons

Pros:

• Lower interest rates: If you qualify, you might snag a lower interest rate, which could save you money in the long run.
• Lower monthly payments: A lower rate often means a lower monthly payment, which might make your budget more manageable.

Cons:

• Loss of federal benefits: If you refinance federal loans with a private lender, you’ll miss out on potential federal perks like income-driven repayment plans and loan forgiveness options.
• Credit score requirements: To refinance, you usually need a solid credit score. If your credit isn’t great, you might not qualify for a lower interest rate.
• Extended repayment: While refinancing may lower your monthly payment, it could extend how long you’re paying, which might mean paying more in interest over time. 

Consolidation: The pros and cons

Pros:

• Simplified payments: Consolidating means you only have one monthly payment and interest rate to worry about.
• Access to federal programs: If you consolidate federal loans through a federal program, you’ll keep perks like income-driven repayment plans and loan forgiveness options. But consolidating with a private lender means losing access to those benefits.

Cons:

• No lower interest rate: Unlike refinancing, consolidation won’t necessarily get you a lower interest rate. It could just be the average of your current rates.
• Extended repayment: Consolidation can lower your monthly payment, but it may also extend your repayment term, which could mean paying more in interest overall. 

One thing to keep in mind

When refinancing or consolidating your loans, there’s a chance your cosigner could be released. If you have one, you should have a conversation to make sure that’s something you’re ready for. 

Considering one of the two? 

You should know that neither option is a guaranteed easy fix. Both refinancing and consolidation offer different advantages and disadvantages. So, before you sign off on a new loan, make sure it’s the best choice for you and your situation.