Student Loan Consolidation or Student Loan Refinance: Which is Better?

Are you one of the millions of Americans working hard to pay off your student loans, but still feel like you're getting nowhere? The average student loan debt in 2015 is at an all-time high of more than $35,000 per student. With average starting salaries of under $50,000 per year, student loan debt is becoming more crippling than ever.

What many graduates don't realize, though, is that there are ways to reduce your debt and pay off your loans faster. Most people just assume that they are stuck with their loans forever and that there's no way to reduce the amount that they owe. Whether you just graduated or you've been paying on your loans for years, not looking into your options could cost you thousands of dollars over the life of the loan.

What is a Student Loan Consolidation?

A student loan consolidation is where you combine all of your loans into one big loan. However, there are two different types of student loan consolidations – one which can save you money and one which won't. A federal loan consolidation combines all of your federal student loans into one. The interest rate for this type of consolidation is the weighted average of all of the federal student loans you wish to have consolidated, or combined. This form of consolidation does not save you money, as the interest rate is just the weighted average.

The second type of student loan consolidation is a private loan consolidation. With this type, you can combine all of your student loans – both federal and private – into one new loan with a new, hopefully better, interest rate. The interest rate is not the weighted average of the individual loans, but is instead based off of your credit score and other financial information. A private loan consolidation is also called a student loan refinance and this type will save you money, assuming your credit score is high enough to qualify you for the best interest rates.

What is a Student Loan Refinance?

Just like a private loan consolidation, refinancing your student loans allows you to combine all of your loans into one loan with a new interest rate and a new loan term.

To see if you would be able to save money by refinancing, take a look at the current interest rates you pay on your loans. The current interest rates on federal loans, for example, ranges from 4.29 percent on Direct Subsidized loans up to 6.84 percent on Direct PLUS loans. Next, comparison shop lenders who offer student loan refinancing and see if their rate will beat your current rates. Some lenders start at low 3.5 percent fixed rates and offer even lower starting variable interest rates. Assuming your interest rates are higher than the current rates, and assuming you have good credit, a refinance could be just what you need to pay off your loans faster and save money in the process.

Keep in mind, though, that if you plan on taking advantage of federal loan forgiveness programs, such as Teacher Loan Forgiveness, you cannot refinance your federal loans. If you do, you'll forfeit the forgiveness programs,

Which is Better?

Both a student loan consolidation and a student loan refinance offer benefits to the borrower, but which is better will depend on your personal situation. If you already have a low interest rate on your loans and your credit score isn't as high as you would like, a consolidation would probably suit you best. A consolidation allows you to simplify your bill-paying process each month by only having you pay on one loan rather than each individual loan. Since the interest rate is the weighted average, you won't save or lose any money in the process.

However, if you have excellent credit and your student loans have high interest rates tacked on them, refinancing is worth looking into. At the very least, see what's out there by comparison shopping student loan refinancing lenders and hearing what they have to offer.

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