Understanding student loan refinancing

What is student loan refinancing?

Student loan refinancing is a great way to pay off student loans faster and reduce your interest rate. It means using a new loan with a lower interest rate to pay off old loans with higher interest rates. Once your old account closes, you are only responsible for the new loan. None of the rates, terms or conditions from the old loan apply to the new one. In fact, you don’t even need to use the same lender to refinance.

The benefits of student loan refinancing are too enticing to ignore. And even more so for doctors, given refinancing is the easiest way to lower your interest rate, but it also allows you to adjust your monthly payment and term length. When done right, refinancing can amount to thousands in savings over time.

What is the difference between student loan consolidation and refinancing?

Student loan consolidation combines multiple loans into a single loan. That means one lender. One interest rate. One monthly payment. Like refinancing, the goal of consolidation is to simplify your financial situation. But they are not the same. To understand the difference between the two, it helps to first know the difference between federal and private student loan consolidation.

Federal student loan consolidation is a program run by the Department of Education. It merges multiple federal education loans into a single direct consolidation loan. But there's a catch. Your new interest rate is the weighted average of rates from your previous loans. It will not decrease. Even with a lower monthly payment, it may require paying more interest over time. However, private student loans do no qualify for a direct consolidation loan. Criteria to qualify varies among private lenders.

The shortcomings of consolidation highlight the advantages of refinancing. For both federal and private loans. You can lower your interest rate based on credit history. You can also adjust your monthly payment and term length based on income. In essence, refinancing and consolidation seek the same end goal. To simplify and improve your financial situation. But refinancing can actually save you money long-term.