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Student Loan Consolidation vs. Refinancing -- Which Is Your Best Option

05/11/2015 03:01 pm ET | Updated May 11, 2016

There is a good deal of misinformation about student loans. Unfortunately, this discourages many graduates from tapping into ways to lower their student loan debt. A common misconception is what exactly student loan consolidation and student loan refinancing are, how they are different, and which might be the best choice for a borrower to alleviate some of his or her student loan burden.

What Is Student Debt Consolidation?

Loan consolidation means combining multiple loans into one single loan. This is done mostly for convenience, to simplify the process and only make one monthly payment.

Consolidation Might Not Always Help

As the Federal Student Aid website notes, borrowers should be cautious when consolidating their student loans. Borrowers may initially be tempted to consolidate and extend their loan term as it significantly reduces their monthly payment, but this could result in thousands of dollars more in interest. Additionally, loan consolidation might lead to the loss of some borrower benefits, such as interest rate discounts, principal rebates, or loan cancellation benefits as a result of switching lenders.

What Is The Interest Rate On Consolidated Student Loans?

Consolidated student loans through the federal government are calculated by taking the weighted average of the interest rates of all the separate loans being packaged together. The repayment term and the lender can be changed during the consolidation process.

Can Private Education Loans Be Consolidated?

Most federal student loans are eligible for government-backed consolidation, but private education loans are not. You can still consolidate private student loans, but you can’t do it through any government program.

What Is Student Loan Refinancing?

Similar to consolidation, student loan refinancing is taking out a new loan to pay off the existing loans and combining them into one. Unlike consolidation, though, student loan refinancing allows the borrower to seek better interest rates and repayment terms, reducing both monthly payments and the total repayment amount of student debt. A borrower can refinance both federal and private loans.

When Refinancing Makes Sense

Even though many people don’t think twice about refinancing their mortgage or auto loan, student loan holders often don’t look into refinancing solutions. Yet those who end up refinancing their student loans can walk away with thousands of dollars saved over the life of their loan. Also, student loan debt can be refinanced more than once, so it pays dividends to explore options periodically.

Student loan refinancing makes the most sense when a borrower has high interest rate loans. In these situations, borrowers with steady incomes and above average credit scores are frequently able to lower their rates and save significant amounts. (The average user who refinances with Credible save over $11,000 in interest payments).

Student loan refinancing is also not one size fits all. Assessment is based on a borrowers financial status, income, credit score, comfort level, and beyond. There are many lenders and services that provide guidance on options on what is best for each borrower.

Check out Credible to get a personalized estimate of how much student loan refinancing could save you on your student loan repayments and if refinancing is your best option.

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