Most people think that consolidation of student loans is the same as refinancing student loans. This is because both the terms are often used interchangeably. However, there are some very fundamental differences between the two terms. Let us first understand what the two terms fundamentally mean.
Consolidation of student loans
Consolidation of student loans is typically used for federal student loans. Consolidation of federal student loans is when you combine different federal loans into one loan amount and you pay only one regular installment in the month as compared to multiple installments that you have to pay in case of multiple loans. You cannot combine private student loans with consolidated student loans. The new interest rate charged on this loan is just the weighted average of your different loans. Therefore, there in no change in the net interest amount you pay. However, you can increase the repayment time of the new consolidated loan from the current typical period of 10 years to the new period, which could be anywhere from 12 years to 30 years. Therefore, the amount that you pay monthly can be reduced significantly.
Consolidation of student loans is typically used for federal student loans. Consolidation of federal student loans is when you combine different federal loans into one loan amount and you pay only one regular installment in the month as compared to multiple installments that you have to pay in case of multiple loans. You cannot combine private student loans with consolidated student loans. The new interest rate charged on this loan is just the weighted average of your different loans. Therefore, there in no change in the net interest amount you pay. However, you can increase the repayment time of the new consolidated loan from the current typical period of 10 years to the new period, which could be anywhere from 12 years to 30 years. Therefore, the amount that you pay monthly can be reduced significantly.
Refinancing of student loans
Refinancing of student loan on the other hand is used when you wish to change the terms and conditions or consolidate your private student loans. In refinancing the entire terms and conditions can be changed from the current terms. In more simple terms, it is a new loan that you take to repay the existing student loans. Since it is a new loan the terms and conditions depend on various factors like your credit report, repayment history and so on and there is a processing fee that is charged by the banks. The interest rate charges, repayment period and eligibility criterion is as per the mutual agreement between the applicant and the lender.
Refinancing of student loan on the other hand is used when you wish to change the terms and conditions or consolidate your private student loans. In refinancing the entire terms and conditions can be changed from the current terms. In more simple terms, it is a new loan that you take to repay the existing student loans. Since it is a new loan the terms and conditions depend on various factors like your credit report, repayment history and so on and there is a processing fee that is charged by the banks. The interest rate charges, repayment period and eligibility criterion is as per the mutual agreement between the applicant and the lender.
Difference between refinancing and consolidation of student loans
Consolidation of federal student loans has a fixed interest rate typically, which is just the weighted average of different federal loans whereas refinancing has a new interest rate can be both fixed and variable as per the suitability of the lender and the applicant. Moreover, the new interest rate charged can be lower or higher than the existing rate of various loans. You cannot consolidate your private student loan with federal student loans but you can refinance both federal and private student loan. The term of consolidation of student loan is typically extended but you can shorten or extend the time when you opt for refinancing. Lastly, you do not have to pay any fees when closing the existing federal student loans and consolidating it but incase of refinancing you are required to pay a certain fee for early closure of your existing loans.
Consolidation of federal student loans has a fixed interest rate typically, which is just the weighted average of different federal loans whereas refinancing has a new interest rate can be both fixed and variable as per the suitability of the lender and the applicant. Moreover, the new interest rate charged can be lower or higher than the existing rate of various loans. You cannot consolidate your private student loan with federal student loans but you can refinance both federal and private student loan. The term of consolidation of student loan is typically extended but you can shorten or extend the time when you opt for refinancing. Lastly, you do not have to pay any fees when closing the existing federal student loans and consolidating it but incase of refinancing you are required to pay a certain fee for early closure of your existing loans.