Consolidation, on the other hand, is a strategy used when you owe balances on more than one student loan.As you may have experienced, since each of those separate loans has its own monthly payment, interest rate, and terms it can be complicated to manage all of them.An application to refinance is much like applying for a new loan at the current interest rate, and your current financial profile and credit score will determine the interest rate you pay.The consolidation can get rid of the headache of managing a number of student loans, and it could even save you money depending on the interest rates.Essentially, there is no difference between consolidating and refinancing your debt, and many companies actually use the two terms interchangeably.Whenever you refinance, if you do so with more than one loan, you’re consolidating them.This means you will have a single payment each month and you will have only one interest rate, whatever the current rate is.
Additionally, loan consolidation might lead to the loss of some borrower benefits, such as interest rate discounts, principalrebates, or loan cancellation benefits as a result of switching lenders.
Looked at a bit more closely, however, you’ll find that both words are used for subtly different processes. This is called Federal Loan Consolidation, and the new interest rate is the weighted average of your old loans’ rates.
Consolidating is used primarily to refer to joining up various loans into one at no cost to you, via the U. While it can greatly simplify loan repayment by combining your payments into one bill, and lower your monthly disbursement by extending the life of the loan up to thirty years, this can only be done with, (you guessed it! It’s important to understand that consolidation can’t be undone, doesn’t really lower your interest rate, and you may end up paying a lot more in interest over the life of the loan. Loan refinancing, or private student loan consolidation, replaces various loans (private and federal), with one single loan.
This is done mostly for convenience, to simplify the process and only make one monthly payment.
Consolidation Might Not Always Help As the Federal Student Aid website notes, borrowers should be cautious when consolidating their student loans.