Many college students unfortunately leave school heavily burdened by debt from student loans. In fact, it is not uncommon for student loan debt to amount to tens of thousands of dollars or more. If you carry student loan debt, you may understandably feel like you have no control over the management of your debt. Your loan payments may be so high that you feel as though they control your financial future. In reality, you have great ability to control and manage your debt, and a closer look at the options for refinancing and consolidation can help you to better determine the steps you should take to improve your financial situation.
Determining What Type of Student Loans You Have
One of the first steps you need to take when you want to explore consolidation and refinancing options for student loan debt is to learn more about the types of student loans you have. Federal student loans are most common, and they generally have more advantageous terms. For example, they often have a lower interest rate and a longer fixed term. In addition, the interest on this type of debt is tax deductible. A private education loan often has a rate that is derived off of your credit rating, so it may be higher. Term lengths can vary substantially. In addition, many of these loans do not qualify for a deduction of student loan interest.
The determination of which type or types of student loan debt you carry is important because it can help you to determine the best course of action. Federal student loans often qualify for a consolidation loan. Through this option, you can consolidate your multiple federal loan payments into a single loan. The interest may change only slightly in most cases, and you may have the option to choose a more advantageous term for easier payment management. When you consolidate federal student loan debt under an approved federal consolidation loan program, the student loan interest will continue to be tax deductible.
Refinancing Private Student Loans
Refinancing private student loan debt can be advantageous in different ways, depending on the type of loan that you use. You can use an unsecured personal loan to refinance the debt into one or several different loans. Because these loans are credit score-driven, you may qualify for a lower interest rate if your credit rating has improved from the time you initially took the loans out. In addition, if you are now a homeowner, you may be able to use a home equity loan to refinance your private student loans. This can make the interest on the debt tax deductible, and this can help you to lower your overall tax burden.
Exploring the Benefits of Refinancing Versus Consolidation
Consolidation is a term that generally describes rolling multiple loans into a single account. With private education loans, refinancing is a more common option available unless you have access to a large funding source, such as through a home equity loan. Refinancing generally describes rolling one loan into another loan that typically has better financing terms. With consolidation, you can expect easier debt management because you only have one payment rather than several to manage each month.
What You Need to Know About Combining Federal and Private Student Loans
Some people consider combining federal and private student loans into a single and very large loan. This is an option in some cases. However, a private loan cannot convert to a federal loan, but a federal loan can be refinanced into a private loan. This means that the only option available when consolidating both types of loans into one is to lose the federal loan benefits. However, if you use a home equity loan to accomplish this goal, you may still be able to enjoy the interest tax deduction.
Making a Decision That Is Best for Your Finances
Your student loan debt may account for most or all of your current debt. You understandably want to make a wise, informed decision about how to proceed. Before you move forward with any single option, consider the benefits of a fixed loan in comparison to a revolving term. Compare interest rates and loan terms available. Think about your ease of managing a single payment versus multiple payments. Review your budget to determine what the most affordable solution is. Remember to weigh the benefits of the interest tax deduction as well.
As you can see, you have great control over how this debt is managed and eliminated. Most people have multiple consolidation and refinancing options available to consider. Because each offers pros and cons and because each person’s financial situation is unique, it is important for you to educate yourself about the options before proceeding.