January 20, 2015 | By RGR Marketing Blog

Consolidating or Refinancing Your Student Loan Debt

Tough job markets, rising educational costs, and slow wage growth have created the perfect storm for a meteoric rise in student debt levels. These days, more college graduates than ever are seeking some sort of relief from unmanageable educational debts.

The two most common solutions for those seeking to optimize their cash flow situations without allowing educational debt to go into default or collections are student loan debt consolidation and debt refinancing.

If you’re in the business of providing beleaguered graduates with debt relief, you’re probably aware of the finer points of both of these options, but your potential clients may not be.

In much of the student debt relief marketing material found online, the terms are almost used synonymously, but there are some differences.

So, what are the key differences between student debt consolidation and refinancing? How are they the same? And more importantly, how can you effectively communicate the differentiating features to your prospects?

Student Debt Consolidation

Consolidation allows educational borrowers to combine multiple student loans into a single monthly payment. There are two basic types of student debt consolidation: federal and private.

As you’ve probably inferred, the U.S. government offers federal student loan consolidation to those with outstanding federal student debt. Federal loans include Perkins Loans, Stafford Loans, FFEL Plus Loans, Federal Nursing Loans, and certain existing federal consolidation loans.

Private loan consolidation allows educational borrowers to consolidate student loans obtained from private lenders such as banks, credit unions, and other privately owned financial institutions.

Can debt consolidation help your clients? Well, that depends on the situation. In the case of federal consolidation, they will be unlikely to see any overall savings, as federal consolidation interest rates are calculated based on a weighted average of existing interest rates.

That being said, having only one monthly payment could make for easier record keeping. Additionally, federal debt consolidation can allow borrowers to consolidate old variable-rate loans into a single fixed-rate product, eliminating worries about shifting interest rates. Further, lengthening one’s payment term as a part of the consolidation process will cost more in the long run, but if it makes one’s monthly expenses more manageable and contributes to a better overall quality of life, then it may be worth the higher overall cost.

Private loan consolidation offers a similar set of benefits, with a possible additional plus for borrowers who’ve improved their credit ratings since they were in college. The new lender can pay off old private loans, and grant new loans at interest rates based on the borrower’s current credit rating. Assuming graduation has increased the borrower’s bankability, private loan consolidation could offer substantial savings.

Educational Debt Refinancing

Here’s how student debt refinancing works: a new loan is taken out and used to pay off the existing student debt. That loan is then repaid at a lower interest rate than the borrower previously paid.

“But wait,” you might be saying, “isn’t that the same thing as private loan consolidation?” Yes – in a nutshell, it is.

What’s the Best Option?

There’s no perfect answer to that question. If your client only owes a few thousand more dollars, it may be best to simply stay the course and pay it off.

If they’re in dire need of a cash flow remedy, refinancing can provide relief, not to mention potentially lower interest rates.

There are no origination or application fees for federal consolidation, and federal interest rates are capped. Federal consolidations are also exempt from prepayment penalties.

While private refinancing options are exempt from some of these restrictions, they may still be a better option, and some private consolidation firms are now offering refinancing for federal student debt as well as private student loan debt.

[Photo Credit: NYTimes; Credit: Jessica Hill, AP]

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