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When It Comes to Student Loan Debt, Is Refinancing or Consolidating Your Best Option?

You’ve probably seen ads for student loan refinancing everywhere — in airports, on the side of buses, in your mailbox. If you’re considering taking the leap into refinancing, it’s important to consider all your options and understand your budget and long-term financial goals.

Refinancing is just one of many options and strategies for managing student loan debt. If you’re thinking of refinancing or consolidating your loans, you’ll want to first ask yourself: Why do I want to refinance? What’s my ultimate goal? Might consolidation be the better option?

What’s on the table?

You may be seeking a lower interest rate or a lower monthly payment. You may simply want to go from managing multiple loans, payments, and due dates to managing just one payment. Once you figure out what you’re trying to accomplish, it will be easier to narrow down your options.

Federal loan consolidation is only available for federal loans. It allows you to combine multiple federal loans, including Parent PLUS loans, into one loan, making it easier to manage payments. It may also result in a longer repayment term, thereby lowering your monthly payment, but increasing the total amount you will pay over time. Consolidating may also give you access to additional income-driven repayment plan options and Public Service Loan Forgiveness. You can also switch any variable-rate loans you have to a fixed interest rate. The interest rate on the new loan is the weighted average of the original loans.

Refinancing, which is available for both federal and private education loans, creates a new loan by paying off the balance of your existing loan(s). The interest rate on refinancing loans is determined by the market and the creditworthiness of the borrower, and you may have the option of either a fixed or variable interest rate. Refinancing allows you to combine all or some of your education loans into one loan. Depending on the lender, this may result in a lower rate, a lower monthly payment, or either a shorter or longer repayment term.  

Weighing the options

At this time, there is no refinancing program offered through the federal government. However, most education loan refinancing programs offered by nonprofits, states, credit unions, private banks, and for-profit companies will allow you to refinance both federal and private loans.

While federal loans may be combined with private loans under most refinancing programs, be careful. You will lose any benefits on your federal loans — including the option for lower payments based on income and forgiveness programs for public service workers — once they are refinanced.

Once you’ve determined your goals, it’s time to shop around to find the program, whether consolidation or refinancing, that best meets your personal financial goals.

Debra J. Chromy, Ed.D., President, Education Finance Council, [email protected]

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