Difference Between Refinancing and Consolidating Your Student Loans

By: | Updated: Jun-19, 2022
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Whenever people discuss student loans, an inevitable question arises: is it better to consolidate or refinance? Obviously, it’s necessary to know the difference between the two most common ways working adults deal with their education debt. But acquiring a grasp of the basics helps to explore the main benefits of the two approaches. Refinancing does a great job of helping to reduce monthly expenses. Both tactics have the potential to simplify anyone’s financial life, improve their credit scores, and boost their chances of obtaining a mortgage. It’s fair to say that many working adults opt for one or the other approach annually, but refinancing generally has more short-term and long-term benefits. Here are the pertinent facts about the two most popular ways of dealing with education loan obligations.

The Main Differences

The words are nearly self-explanatory. A refinance agreement means getting a brand-new loan to replace the old ones. Even if you only have one outstanding school obligation, when you refinance it, all the terms, conditions, rates, and other provisions are completely different from the old one. Consolidation is typically a choice of people who have several outstanding loans, all with unique payment dates, interest rates, etc. The borrower works with a lender who simply rearranges all the contracts, so they have a single monthly due date. The new interest rate is based on a weighted average of the old ones. In essence, nothing has really changed except for the logistics of paying.

Difference Between Refinancing and Consolidating Your Student Loans

Lower Monthly Expenses

When adults decide on refinancing student loans, they often do so for the sole purpose of cutting their monthly cash outflow. In fact, a refi can be one of the most immediate and powerful ways to shore up a personal budget and get one’s life under control. Because the contract is fresh, and the borrower often has better credit and more income than when the original loans were written, the refi can feature more favorable interest rates, repayment periods, and more. The primary benefit for the vast majority of consumers who opt for this strategy is to reduce their monthly expenses. If you’ve ever refinanced a car or a home, then you already know how the process works. With student loans, a refi can be a potent form of financial restructuring and is an excellent way to deal with education debt.

Simplify Your Financial Life

Both refi’s and consolidations have the effect of simplifying a person’s financial life. They both replace multiple due dates and individual agreements with a single document that lays out all the new rules, dates, conditions, interest rates, etc. Some borrowers opt for consolidations for this very reason and have no intention or need to restructure their debt. However, those who choose to refinance nearly always do so for the monetary benefits involved.

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Improve Your Credit

There’s a less obvious advantage of refinancing a loan, and it’s connected to the health of your credit. You should also understand there is a difference between credit score and FICO score as both will be affected. When borrowers are able to save a significant amount on their monthly expenses, they tend to pay all their other bills in a timelier way, save more money, and handle their finances in a more efficient way. In the long run, that kind of activity usually pushes credit scores higher.

Buying a Home in the Near Future?

A refi can have a powerful effect on your ability to purchase a home, especially if you’re a first-time buyer and new to the process. The reason is simple: carrying less debt, in the form of lower monthly payments on student loans, translates into a better DTI (debt-to-income ratio), a key metric used by lenders to approve mortgage applications.

It’s Not Consumer Loan Consolidation

Be careful not to confuse debt consolidation services, which are designed for those who have vast amounts of credit card debt, and education loan consolidations, which are simply a way for borrowers to rearrange all their contracts into one neat package.

Why Refinancing is Usually Better

Anyone choosing between a consolidation or refi of their education debt should usually opt for the latter. When you refinance, you nearly always gain access to better terms, rates, and repayment arrangements. There’s nothing wrong with consolidating your outstanding obligations, but a refinancing agreement delivers solid advantages that can improve your overall financial health.

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