Student Loan Consolidation vs. Refinancing
What’s the right choice for getting the help you need?
So you’re struggling with out of control student loan debt. What do you do?
Well, it really depends on the type of problems you’re really facing. Are you really concerned about the amount of interest you’re paying or do you really need help reducing the amount you pay each month?
The way you answer that question will determine which path you take to move forward.
Fact: Unlike credit card debt consolidation, student loan consolidation doesn’t do anything to your interest rates.
When you need to refinance
Let’s say you’re making your student loan payments every month and you’re not struggling to get by, so much as frustrated with your progress. You’re making payments, but you’re barely making a dent in your loans and it’s going to take decades to pay everything off.
In this case, the problem is really your student loan interest rates. If you reduce the interest applied to your loans, then more of each payment that you make goes to reducing your debt instead paying off interest.
This is where you use student loan refinancing. If you took your loans out when interest rates were high, then refinancing now could reduce your rates. It probably won’t change your payments, but you’ll pay off the debt faster and finally get free.
When you need to consolidate
Now let’s say you’re having a different problem – your payments are taking up too much of your income and leaving you in a bind. Forget total interest paid and the time it takes to eliminate your debt – you’re just worried whether you’ll ever be able to eliminate it at all!
In this case, consolidation is what you need. You take all of your federal student loans and roll them into one bill. The goal of consolidation is to reduce your monthly payments. You pay only one bill on your student loan debt and it’s usually significantly less than what you paid in total when all of your debts were separate.
The tradeoff with consolidation
It’s important to note that you’re usually making a tradeoff when you consolidate. Your monthly payments will be less, but the time you have to pay back the loan is extended.
What’s the standard amount of time you’re usually given to pay off a student loan prior when you initially take on the debt?
a) 5 years after you stop attending school
b) 10 years after you stop attending school
c) 5 years after you take out the loan
d) 10 years after you take out the loan
The clock usually starts from the date of your graduation or the last date you attended school at least part time if you didn’t graduate.
b) 10 years after you stop attending school
Instead of 10 years to pay back your student debts, most consolidation programs extend the term to 25 years. This means 15 extra years of paying added interest charges.
The result? You may end up paying more in added interest charges over the life of your loan. However you’ll avoid delinquency which can ruin your credit and get your wages or tax returns garnished. If you’re falling behind, it’s worth it to consolidate.
Can I consolidate AND refinance?
In some cases, it’s not either/or – it’s both. If you took your government-backed student loans out at a time when Congress was being Congress and rates were too high, then refinancing will reduce the APR on your debts.
At the same time, if you have multiple debts and out-of-control monthly payments, then you also need to consolidate. So your student loan rep will consolidate your loans AND refinance at a lower APR. However, just because the APR is lower, if you’re paying for longer then you you may end up paying more in added interest charges when all is said and done.
When all is forgiven…
It’s also important to note that if you get student loan debt help of any kind, then you’re eligible for debt forgiveness… eventually. As long as you make the scheduled payments on your consolidated loans for 25 years, then any remaining balances on your debts will be forgiven.
In some cases, you can get your debts forgiven sooner if you work in any kind of public service industry. The government views it like this – if you’re willing to take a pay cut to serve your fellow man, then you deserve some leeway on your loans. So instead of forgiveness after 25 years, you qualify for forgiveness after only 10 years.
Which type of profession would get your student loan debts forgiven after 10 years?
a) A nurse for an urgent care facility
b) A security officer at a public high school
c) A police officer for a major metropolitan area
d) A lawyer who works a lot of pro bono cases
A police officer qualifies regardless of the size of their jurisdiction or rank. Note that the nurse doesn’t qualify because she doesn’t work for a public nonprofit hospital.
c) A police officer for a major metropolitan area.