Flickr user Bill Dickinson
When looking for ways to manage your loan repayment you will come across the terms ‘refinancing’ and ‘consolidation’. While both of these are offer practical alternatives to managing your student loans, they may not always be the best option for all borrowers. Moreover, there are several myths out about student loan refinance and consolidation that may cause you to make a decision that could potentially jeopardize your finances. Before you choose either of these options, it is important to distinguish myths from facts so that you can make the best choice possible.
Read up on our first post about student loan refi and consolidation myths here!
Myth: When you refinance, you must include all of your student loans.
Fact: Loan refinancing is not an all-or-nothing option. You can choose to refinance only one loan or you can refinance multiple loans in any combination that works best for you over time. The main goal is to exchange your old loan for a new one with a lower rate of interest. It makes sense then to only choose to refinance those loans that have a higher interest rate as compared to the new loan. The best way to do this is to take a look at the current rates of interest for your student loans and only refinance those with the highest rates.
Myth: The consolidation process is standard across all types of student loans
Fact: The process for consolidating student loans varies considerably, depending on whether you are consolidating federal or private student loans.
To consolidate your federal student loans you will need to submit an application for a Direct Consolidation Loan. This can be done at the Federal Student Aid website. Remember, the only goal with loan consolidation is to make it easier to manage your monthly payments, not to save money. The consolidated loan will have the same interest rates so you are not likely to save money in interest rates.
Consolidating your private student loans can only be done with a private student loan company. Consolidating a mix of both your private and federal student loans can also only be done with a private lender. In this case, the rate of interest and the terms of the refinance are entirely at the discretion of the refinancing company. In most cases, your credit history, monthly income, and other personal financial information will be taken into consideration to determine your eligibility to refinance and also to calculate the interest rate.
Myth: You have to pay a fee to consolidate your federal student loans
Fact: Federal student loan consolidation is done through the federal government and does not cost you anything. There are private third-parties who charge a fee to facilitate the consolidation process but that is entirely unnecessary. You can complete and submit the application for Federal Direct Consolidation Loans online. The entire process will take you all of 30 minutes.
Consolidating private student loans may not be as straightforward. You will have to shop around and compare offers from multiple lenders. Once you determine which lender is offering you the best deal, you can then complete and submit the application online. Reputed private lenders do not charge borrowers any origination, application or disbursement fees.
Myth: Getting refinancing quotes can affect your credit score
Fact: This one depends on the lender. Most lenders will perform a soft credit check when you make inquiries about rates for student loan refinancing. These soft inquiries do not hurt your credit score. Don’t take it for granted though. Before you request a quote, verify with the lender that they will perform a soft credit check that will not affect your credit history.
Myth: You can only refinance your student loans once
Fact: Student loan refinance is not a one-time thing. You can refinance a loan that you have already consolidated or refinanced if the interest rates fall and you want to take advantage of the lower rates. You may also want to refinance a consolidated or refinanced loan to a variable rate if you think student loan interest rates are likely to fall in the future. This is a high-risk option though and one that you should take only after weighing the benefits and risks thoroughly.
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