In order to achieve freedom from debt, it’s important to get the right post-graduation repayment strategy. Sometimes this involves loan consolidation or refinance. Knowing the pros and cons for each of these repayment strategies and making an educated decision about which route to take can be the difference between successfully managing the payments and going into default.  The primary difference between federal loan consolidation and refinancing is the type of loans that qualify. Federal loan consolidation is only available for federal loans – loans from the government. Refinancing, however, is offered only through private companies, but is an option for both federal and private loans.

Under federal loan consolidation, the government takes the individual loans and combines their balances into a single Direct Consolidation Loan. This is beneficial for borrowers who are struggling to manage multiple monthly federal loan payments and especially beneficial if the payments are owed to different servicers. With federal loan consolidation, debtors can pick a single loan servicer to issue and manage the payments. Borrowers will also receive a new interest rate, which is calculated as a weighted average of the former loans’ interest rates.  Additionally, federal loan consolidation will allow individuals to maintain access to the repayment advantages of federal loans such as PAYE, IBR, and ICR, the ability to temporarily postpone loan payments, and access to loan forgiveness programs such as Public Service Loan Forgiveness.

While there are quite a few benefits with federal loan consolidation, there are also some federal loans that are better left unconsolidated. Federal Perkins loans come with their own forgiveness programs so consolidating those loans would forfeit its unique benefits. If a borrower is looking to consolidate federal loans, it is highly advisable that Perkins loans are kept separate. For example, Teachers with Perkins loans who work full-time in qualifying schools are eligible to have up to 100% of their Perkins loans cancelled. Additionally, other public service jobs provide similar benefits for forgiveness and repayment to those with Perkins loans. Therefore, before consolidating, individuals should be sure to explore their options and speak with the loan servicers and schools that disbursed their Perkins loans.

Refinancing can be a safer bet when borrowers want a lower interest rate on their loans then what they currently have. In order to attain this, borrowers will take on a new private loan with a single monthly payment and a new interest rate based on their credit history. Since refinancing is only offered by banks and private firms, only private loans are available for refinance. Debtors can refinance their federal loans, which will result in a single private loan without any federal loan protections. When deciding whether or not to refinance federal loans, individuals should weigh the risks of forfeiting the federal protection. Usually, refinancing private loans only is a smarter choice. In addition, a borrower would be advised to consider not just the interest rate being offered, but to also understand the terms and conditions.

Consolidation and refinancing aren’t for everyone. There are different demographics that benefit from the various repayment strategies. Typically, refinancing provides the best deals for those with a strong income, excellent credit score, and a substantial loan debt because they will save the most on interest. For consolidation, it’s important to consider the likelihood of wanting to defer loans, repay loans through income-driven plans, or enroll in forgiveness programs.  Each has its own advantages and disadvantages, but by asking the right questions and obtaining the right answers the payments will be manageable and save money.

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