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Students who need to create a long-term plan for their financial goals may consider the benefits of consolidating or refinancing existing student loans. There are quite a few options available when completing the consolidation process. It can be difficult to describe this process to students because it may involve many variables. The complication is the result of a system that attempts to address a large variety of circumstances. This creates a complex system that offer conditional options to different student populations.

Student Loan Categories

The first step is to understand student loan categories, consolidation and refinancing. The lack of clarity about these terms can create a situation where students do not understand their actual options, or they could be lead to believe that these options do not exist. The first step in getting accurate information about your student loans is to check the website of the National Student Loan Data System, or NSLDS, and find out what kind of loans you have on your account.

Here are the most common types of student loan categories:

  • FFEL, or Federal Family Education Loans
  • Federal Direct Loans
  • Private Loans

To manage these loans over a long period of time, you must learn the relevant loan categories. The terms and conditions available for consolidation and refinancing depend primarily on the type of loan you have, so you need to understand the categories in order to decide on the next step. The consolidation options are only available to government-issued student loans, for example. If you have private loans, these will not qualify for consolidation. Conversely, refinancing is available for all loans, but you need to understand the relevant trade-off here before making an informed decision.

Consolidation, or Refinancing?

Each type of loan may limit or restrict the options you have when considering whether to consolidate or refinance the loans. For example, the FFEL and direct loans are eligible for consolidation because they both originate from the federal loan program. Students who are considering consolidating these loans need to be aware that the interest rates of the different loans will also be consolidated, so you may not end up with an interest rate identical to your lowest interest rate. For additional information about federal loan consolidation, visit the federal student loan website.

Unlike federal loans, private loans cannot be consolidated through the government loan program. These loans, however, are subject to refinancing through the lender. Refinancing involves filling out a loan application with the lender for a new loan with a new interest rate. This loan will be used to pay off the previous loans, and the new interest rate can allow you to lower your monthly payments. In addition, if you refinance your federal student loans through a private lender, which is certainly possible, you will lose access to the unique repayment options that are only available through the government student loan programs.

Additional Considerations

Consolidation through the federal loan program is beneficial in many cases. For example, if you want to qualify for the loan forgiveness program, you may need to consolidate your FFEL loans under a direct loan program in order to qualify. In addition, the loan consolidation program can increase the total cost of borrowing over time. The trade-off for these loans is that the long-term loan that increases the total amount you pay over the life of the loan will also allow you to enjoy a relatively low monthly payment. As always, the faster you pay off the loan, the more money you will save by circumventing the effect of the interest rates. Contact a loan specialist if you have additional questions.