Necessary knowledge of student loans doesn’t end after you’ve applied and accepted the granted loans. After college, whether you graduate or leave early, you will be responsible for repaying those amounts so it pays to understand how to do that, which may include loan refinance and consolidation. However, there are a lot of myths floating around out there about the two words. Here are three myths you should be wary of when it comes time to repay your loans:
Myth: Consolidation is the Same as Refinancing
Many people, not only college students and graduates, mix up student loan consolidation and refinancing or use the two words to mean the same thing. They are not the same. When you consolidate your student loans, you combine multiple loans into one total loan. This comes with an interest rate that is the average of all the loans’ interest rates plus one percentage. This can be used for private loans and federal loans.
On the other hand, when you refinance a student loan, it can only be used through private lenders, though you can refinance both private and federal loans. Refinancing means you are taking out a new loan to pay off a previous loan or debt. At this time, you can change interest rates, types of rates, repayment schedules, and payments. However, it’s important to keep in mind that you cannot refinance a federal loan through the federal government.
Myth: Consolidation is the Same For Every Loan
When you consolidate a loan, it is often thought to have the same process for every loan available. There is no single way to approaching student loans however when it comes to consolidation. This is especially true when comparing federal loans to private loans.
Federal student loans can be consolidated through the student aid website, but private loans will have to be done through a private lender. If you have a mix and you want to combine all the of the student loans under your name, it will have to be done through a private lender as well.
Myth: You Should Always Consolidate Your Loans
The main reason most people consolidate their loans is to make paying them back easier. However, while this may seem like a plus, you will definitely want to weigh the pros and cons of consolidating to your debt and personal financial situation.
While consolidation opens more doors for repayment plans and easy repayment, it could cause you to pay a lot more. Interest rates are generally higher for consolidated loans than the original loans themselves, so it could actually become more expensive in the long run to combine them. This is especially true if you are increasing the term length of the loan. Many loans have terms that go up to 30 years.
Student debt is no fun, but knowing how to handle it before you even graduate can be a huge plus. If you’re unsure on how to tackle your debt after graduation, whether you should refinance or consolidate, talk to a professional about your individual situation and income. They could provide some valuable insight into the best path for you financially.
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