For those of you who’re struggling with managing your student loan payments, know that you're definitely not alone. It's a complex and very challenging issue that millions of other students across the United States are also having trouble with, and will continue to do so as a result of growing economic uncertainty and insecurity.
The average college student graduates with around $26,900–$32,600 worth of student debt at the time of graduation, based on figures from 2017. While it seems like a fair amount to pay off over 5–20 years (repayment plans vary)—but that's not accounting the interest rates that will accumulate and bump your total amount by thousands of dollars more.
Often, students rely on multiple forms of financial assistance, including federal and/or private loans, grants, scholarships, aid, and more. When this happens, it’s difficult to manage long-term payments and accumulate student debt, alongside others such as mortgages.
But before we get into the pros and cons, and compare both options, here are some basics about them:
Federal Student Loan Consolidation Made Easy
The government issues millions of dollars worth of federal loans each year, but there is a capping limit, which means you'll have a fixed amount to owe them. However, this also probably means you borrow multiple loans at different points, be it annually, or for a different level of education.
Federal student loans can be consolidated to bring together all your existing federal loans and payables into one amount, streamlining the payment process significantly. If you have private loans in addition to this, however, you can't consolidate those. Neither can you refinance your loans for more manageable payments.
The new loan is charged an interest that’s a weighted average of your previous loans, giving you a rounded off figure—which also means that you are unlikely to save a significant amount over time.
It primarily serves an organizational purpose, helping make things easier and more manageable, as opposed to offering you leeway.
However, it's a great way to extend repayment plans if that's your goal. But while you pay less each month, you're paying more over time thanks to the accruing interest.
Private Loan Consolidation and Refinancing
Private loan consolidation is different in the way it’s fairly inclusive. You can consolidate federal and private loans, even if they're from other lenders such as banks or unions, to consolidate your payments into one.
Often, the interest rate is likely to be lower than before, or at least be variable and thus more competitive. If you previously had a variable rate and would like the stability of a fixed rate, you can switch to that option too.
Your lender will use your previous credit history and records to gauge and calculate an interest rate that is reflective of your financial standing. The better your credit score is, the lower your interest rate is likely to be.
It’s important to always check and compare rates before student loan refinancing and consolidation because the goal is to get the best interest rate for your needs. Consolidating your private and federal loans through a private lender also refinances them by default, giving you one loan.
The new loan and potentially lower interest rate are what will help you save thousands of dollars in interest over time. It's also an effective alternative to extended payment plans.
With refinancing, you can change your repayment plan and often be exempted from prepayment penalties, not to mention, count your interest as tax deductibles.
Refinancing is an excellent option for individuals looking to change their repayment terms, combine your loans and make payments more accessible, and lower the monthly and overall interest you pay.
You can also choose a variable interest loan, which is great for those who want to pay sooner than later.
Which Choice is Better for You?
When it comes to choosing whether Direct Consolidation Loan or Loan Refinancing, it's essential to factor in your financial standing, credit history and score, and the advantages and disadvantages of both options.
While federal loans do offer the option of loan forgiveness, deferences and forbearances, and other benefits that private loans may not, these are tough to come by.
The advantages of a federal loan are largely dependent on current and future policies, and scarcely do people see debt forgiveness, making it difficult to manage several loans simultaneously.
Refinancing through a private lender such as Education Loan Finance (ELFI) is a better option in many ways because it allows you flexibility, more considerable savings, lower monthly payments, and a faster repayment schedule. You'll be debt-free sooner and avoid many of the unforeseen changes and hidden costs of more extended repayment plans.
Visit their website to know more about their loan refinancing services for students at the undergraduate, graduate, post-graduate level, and those in their professional careers looking forward to a debt-free, saving-filled future.
Emily Scott is a young finance professional making their way through the world of student debt, career switches, and understanding how to manage their own finances, sharing advice, tips, and expertise they have garnered through their interactions and experiences.