If your FedLoan Servicing repayment isnâ€™t going as you had hoped, you might be staring at two seemingly similar options: Both FedLoan consolidation and private loan refinancing would consolidate or group your federal education debt, making for a more straightforward repayment.
But thatâ€™s where similarities between consolidation and refinancing end. If youâ€™re unsure about which to go with, read on for the details.
Consolidation involves taking out a direct consolidation loan to repay your original federal student loan debt, and it could solve a number of problems.
Most notably, you could make a single monthly payment to one servicer instead of a handful of them (if you have multiple federal loans serviced by various companies). Although that wonâ€™t save you any money, it could bring you much appreciated simplicity.
Through federal loan consolidation, you could also expect the following benefits:
The benefits arenâ€™t bereft of fine print, however. When you consolidate loans youâ€™ve already started repaying, for example, you reset the clock on any progress toward forgiveness via IDR or PSLF. Also, none of your private loan debt (if you have any) can be combined via a direct consolidation loan.
If the pros outweigh the cons in your case, file your FedLoan consolidation application at StudentLoans.gov. According to the website, most applicants are able to complete the necessary forms in less than 30 minutes.
If you elect to keep FedLoan as your servicer, you can track your application progress via your MyFedLoan account. A resolution should arrive within four to six weeks.
When you consolidate your federal debt, your new loanâ€™s rate will be a weighted average of your previous federal loansâ€™ rates, rounded up to the nearest one-eighth of 1%.
Via student loan refinancing, however, you could reduce the collective interest rate of your federal debt â€” and (unlike with consolidation) your private student loans, too â€” potentially cutting it by whole percentage points.
Thatâ€™s the greatest difference between FedLoan consolidation and private refinancing â€” and it explains why many creditworthy borrowers save hundreds even thousands of dollars on interest when working with a private lender.
Say you have four federal loans with FedLoan Servicing worth $35,000 accruing interest at an average rate of 7.00%. Now say you have sterling credit and stable income (or a cosigner who does). By refinancing to a rate of 5.00%, youâ€™d save $4,218 on interest over the next decade.
To be eligible for such savings, however, you â€” and your cosigner, if you have one â€” must submit to a credit check. Only applicants with strong credit gain access to the lowest rates advertised by competing lenders. This stands in contrast to consolidation, which has no such credit requirements, making it a more accessible option.
If you have the finances to qualify for refinancing, you could enjoy other benefits besides a lower interest rate, including:
The cons, however, are just as consequential. In exchange for the perks of private refinancing, youâ€™ll lose access to all federal loan protections. This includes mandatory forbearance (should you need to pause your payments), IDR programs and forgiveness programs like PSLF.
Because refinancing is irreversible once you sign your loan agreement, itâ€™s wise to weigh these plusses and minuses in advance.
If you elect to refinance, you can initiate the process byÂ shopping around for the Â best possible loan terms. You might also delay your search to improve your credit or find a cosigner who can help you qualify for the very lowest rates.
Once youâ€™ve selected a refinancing lender â€” whether it be a bank, credit union or online-only lender â€” it would pay off your FedLoan (and any other eligible education debt). Then your lender would issue you the newly refinanced loan as a fresh start on your repayment.
Try crunching some numbers on our student loan refinancing calculator to estimate your savings (or cost), plus your new monthly payment, when comparing lendersâ€™ quotes.
If you have poor credit and no cosigner in sight, you might already have your answer. Consolidation wonâ€™t save you money, but it will simplify your repayment, and itâ€™s accessible to all federal loan borrowers.
With strong credit, you might also have the option of refinancing on the table. Whether itâ€™s right for you, however, is another story.
As youâ€™ll see, picking between consolidation and refinancing for your FedLoan debt (or any other loans, for that matter) isnâ€™t just about what youâ€™ll get. Itâ€™s about what youâ€™re willing to give up.
This chart might help you as you consider which strategy is best for your situation:
|Whatâ€™s your repayment goal?||Do you need federal protections?||Your better option is probably …|
|Switch to a single monthly payment (for your federal loans only)||Yes||Consolidation|
|Switch to a single monthly payment (for both federal and private loans)||No||Refinancing|
|Reduce your interest rate||No||Refinancing|
|Work with a new loan servicer||Yes||Consolidation|
|Work with a new lender||No||Refinancing|
|Choose a variable interest rate||No||Refinancing|
|Lower your monthly payment||Yes||Consolidation|
|Lower your monthly payment||No||Refinancing|
|Make income-based payments and work toward loan forgiveness||Yes||Consolidation|
If youâ€™d like to switch loan servicers, have a single monthly payment and reduce your interest rate, refinancing could deliver all three benefits.
But if youâ€™re not willing to yield your government-exclusive loan options (such as IDR and PSLF), then you could settle for two out of three: Consolidation would allow you to work with a new servicer and achieve a simpler repayment, but not lower the rate.
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