Have you ever thought about your private student loan consolidation options? Before you get too deep into the weeds, let’s clarify the difference between student loan “consolidation” versus student loan “refinancing.”
These two words are mistakenly used interchangeably, but they’re not the same. Federal Student Loan Consolidation is only available for borrowers with federal student loans, not private student loans.
Though similar to consolidation, where a lender pays off multiple loans and creates one new loan, student loan refinancing is available whether you’re consolidating private student or federal student loans — or both.
Here’s what you need to know about the advantages of this repayment method and how to consolidate private student loans through refinancing.
Benefits of Refinancing Student Loans
For many borrowers, refinancing your student loans is the right choice for repayment. What benefits does refinancing provide?
Lower Interest Rates and Better Terms
If you have great credit, you might secure much lower interest rates than you had with federal loans. Securing a lower interest rate and better terms is largely based on your credit history, your current salary, and your debt-to-income ratio. When refinancing your loans, you lose access to federal protections and repayment options. Make sure you won’t need those programs before making that decision.
Let’s say you have $180,000 in Direct PLUS loans from grad school at the interest rate of 7.6%. If you have good credit, you could lower your interest rate to 5%. That interest rate change would drop your monthly student loan payment from $2,146 to $1,909. Over a 10-year repayment period, you would save $28,423 in interest fees.
Single Monthly Payment
By combining all of your loans into one private loan, you make repayment easier. Also, instead of having loans through multiple loan servicers, you have one loan through a private lender that you chose.
You Can Apply with a Cosigner
If you can’t secure a lower interest rate refinancing on your own, you can look into applying with a cosigner. A cosigner is someone that’s held responsible for your student loans if you fail to make payments. The ideal cosigner is a spouse, relative, or close family friend with excellent credit. Many private lenders also offer a cosigner release.
Refinancing offers many benefits you won’t get through consolidation. If you aren’t pursuing loan forgiveness and have large student loan debt, refinancing could be for you.
How to Pursue Private Student Loan Consolidation by Refinancing
If you’re thinking about refinancing your private student loans, be sure to follow these steps to ensure you’re making the best repayment decision for you:
1. Assess Whether You Need Federal Protections
Will you need access to loan deferment or forbearance? Do you need an income-driven repayment plan in order to afford your monthly payments? What about loan forgiveness? If so, then refinancing isn’t the best option.
2. Calculate Which Repayment Option is Best for You
In order to choose the right repayment option, you’ll need to spend time crunching the numbers for each available option. A great way to do this is to use our free student loan calculator, which allows you to compare payments and potential savings all in one view.
3. Shop for the Most Competitive Refinancing Interest Rate
One of the great things about refinancing is that borrowers have some control when it comes to which lender to use. Of course, you’ll need to meet their requirements in order to be approved, but you have freedom to shop around and weigh the pros and cons for each private lender.
If you’re interested in refinancing your student loan debt, check out cashback refinancing bonuses to see how much you can earn in the process. If you qualify, these offers are hard to beat.
4. Prepare Your Documents and Submit a Formal Application
Once you’ve made a decision on which private lender to go through for refinancing, complete any necessary paperwork. Be sure to read each detail carefully and understand any terms and conditions before applying.
5. Continue Making Payments
Until your application is processed and approved, continue making your normal student loan payments. Make sure your loan doesn’t go into default during this process.
6. Start Making Payments on Your New Loan
Once you’re approved, your old loan is paid off. Start making payments on your new loan according to your approved terms to remain in good standing with your new lender.
Student loan consolidation and private student loan refinancing can both simplify your student loan payments. However, both are very different programs. Take time to weigh the pros and cons of each option before making a plan to repay your student loans. Any decision you make has the potential to drastically affect your life.