Debt Consolidation Myths: Refinancing Consolidated Student Loans


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If you have several student loans spread across multiple service providers, you may have trouble managing your loans or keeping track of your payments. One option that can help is student loan debt consolidation.

A direct consolidation loan combines your federal student loans into a single loan. Instead of having to track multiple student loan service providers and payment due dates, pay just one monthly payment to one lender (or administrator — sometimes they’re one and the same).

While student loan consolidation can be a smart way to manage your repayment, it’s often misunderstood. For example, you are wondering if you can privately refinance student loanslen after consolidation. Yes, you can still refinance consolidated student loans — we’ll get to that, along with these other common misconceptions:

Myth 1: Debt Consolidation for Student Loans is the Same as Refinancing

A lot of people think consolidation and refinancing are interchangeable terms, but they are two very different processes.

consolidation refinancing
● It involves combining federal loans into one direct consolidation loan, which is published by the Ministry of Education.
● To continue student loan debt consolidation, you can start the process on the Ministry of Education website.
● It is only available through private lenders.
● You can choose to refinance one loan or several loans, and they can be federal or private.
● Unlike consolidation, refinancing federal loans with a private lender makes them private loans, meaning you lose access to federal repayment plans and forgiveness programs.
● If you are interested, please compare the best lenders to refinance student loans.

Myth 2: Consolidation saves you money on your loans

Student loan consolidation can simplify repayment by combining multiple federal loans into one – although it won’t save you money on your loans or give you a loan. lower interest.

Instead, after federal consolidation, your interest rate will be the weighted average of the rates of the loans you’re consolidating, rounded to the nearest one-eighth of a percent — as such, your interest rates will basically stay the same, if not increase slightly.

On the other hand, refinancing can potentially lower your interest rate. As long as you have strong credit and a certain income – or can apply with a co-signer who does – you can get a lower interest rate and save money on your student loans.

Many borrowers choose to refinance so that they can get a lower interest rate, which in turn can help lower monthly payments and save money on interest over the life of the loan.

If you want to compare the direct benefits of direct loan consolidation vs. private refinancing, check out our refinancing vs. student loan consolidation below:

Consolidation vs Refinancing Calculator

If you are consolidating your federal student loans through the direct loan consolidation program, your new interest rate will be set to , slightly higher than your current rate of . If you choose to stay on the standard repayment plan, you pay and would finish paying off your loans in . If you refinanced your student loan, with a and 15 year term, would you pay and pay off your loans by .

Refinancing is the only way to lower your interest rate, but you could lose some of the safeguards associated with having federal loans, so make sure you’re fully informed about the decision by reading our recommended resources below:

Student loan refinancing APRs as low as %. Check your rate in 2 minutes.

Myth 3: The only way to lock in a fixed rate is to consolidate

For a long time, consolidating your federal loans was the only way to get a fixed interest rate, rather than a variable one, for the duration of the repayment. That can protect you from market fluctuations and help you save money.

However, that changed in 2006. The government passed a bill that fixed interest rates for the duration of federal loans. Even if interest rates skyrocket after you graduate, you would continue to pay the same interest on your original debt. That means if you have federal loans, you don’t have to worry about consolidation to get a fixed rate; you already have one.

However, private loans can be accompanied by: fixed or variable rates, and the same goes for refinanced student loans. When taking out a private student loan, or refinancing one or more existing ones, you can choose between variable and fixed rates.

Floating interest rates usually start lower but can rise or fall over time in response to market changes. If your interest rates have risen or you are concerned about rising rates, refinancing your debt to a fixed-rate loan can provide security.

Myth 4: You Can Consolidate Federal and Private Student Loans Together

Only federal student loans are eligible for a direct consolidation loan. Private student loans are not eligible for consolidation through the Department of Education.

That said, you can combine federal and private loans through student loan refinancing. Or you can choose a single loan to refinance and leave the rest as is.

When it comes to refinancing, it’s up to you to choose which loans would benefit from refinancing and which are better left alone. For example, you can decide to refinance only your private loans.

And if you refinance federal loans with a private lender, you make your debt private and you lose access to federal programs and protections, including direct loan consolidation, means-tested repayment plans and Forgiveness of Public Service Loans.

Myth 5: You Can’t Refinance Consolidated Student Loans

If you already opted for a direct consolidation loan, you may be wondering if refinancing is still possible. Fortunately, this myth is completely false.

A direct consolidation loan is a federal debt and all types of government education debt can be refinanced with a private lender. The fact that you are already consolidating will not affect your refinancing.

Likewise, if you’ve refinanced private student loans before, but are looking for an even better deal or a chance to change your repayment, you can always refinance them again. You can reapply with the same lender or decide to check out the competition.

When refinance your student loans more than onceHowever, be wary of unnecessarily extending your repayment or switching to a lender that charges origination or other frivolous fees.

Myth 6: You have to pay to consolidate your loans

There are many companies that will charge you a fee in exchange for consolidating your loans for you. However, do not fall prey to these and others student loan scams – you can do it yourself for free. The application for federal direct consolidation loans can be completed online in about 30 minutes.

If you have private loans that you want to refinance, you can do so by searching lenders and comparing offers yourself. Once you have found the conditions that work for you, you can submit your application online. The best private lenders do not charge application, initiation or disbursement fees.

Myth 7: You Need Excellent Credit to Consolidate Student Loans

Wondering if you have enough credit to consolidate student loan debt? Rest assured that the consolidation process does not check your creditworthiness at all.

To qualify, you must only have eligible federal student loans that are actively repaid or have a grace period. If your loans have become delinquent or defaulted, you may be able to consolidate them to put them back in good standing.

While consolidation has no credit requirements, refinancing does. While refinancing can save you money on your loans, you must demonstrate that you have the financial data to qualify for lower rates. You (or your co-signer) must have a strong credit score and a steady income. You can check out our quiz tool to get an idea of ​​your eligibility.

Myth 8: Consolidation is a good idea for all borrowers

While student loan debt consolidation may be a wise move for some, it’s not for everyone. For federal loans, a direct consolidation loan can help you if you plan to apply for an income-driven repayment plan. But it can also extend your repayment term, causing you to pay more interest.

You run the same risk when you refinance student loans. like you choose a loan term For example, at 15 years, you decrease your monthly payments but increase the amount you pay over the life of your loan.

Student Loan Comparison Calculator

Refinancing is also not the right move for you if you rely on federal programs and protections. While some private lenders offer flexible terms and tolerance and procrastination programs, they don’t offer the same flexibility as Federal Student Aid.

Consolidating and refinancing can help you get your debt under control, but you need to make sure you understand the tradeoffs and have the financial security to handle your payments in the future before making any changes to your student loans.

If you’ve done your homework and decided that student loan refinancing is the better choice, consider our marketplace of top lenders.

Rebecca Safier and Andrew Pentis contributed to this report.

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