Refinancing And Debt Consolidation: How To Choose The Best Option

Refinancing And Debt Consolidation: How To Choose The Best Option
When it comes to student loans, student loan consolidation or student loan refinancing is one of the most critical choices. Your choice is important and could mean tens of thousands of dollars in savings.
Read further to know more about the difference between student loan consolidation and student loan refinancing.


In student loan refinancing, both private and federal student loans are eligible. You can choose to refinance federal student loans and private student loans separately or want to deal with them at the same time.

Essentially, in student loan refinancing, you combine one, some or all your existing student loans into a single student loan. A new and private student loan replaces your old student loans.

In Student Loan Refinancing, when you refinance student loans, you receive a new interest rate that is lower than the interest rates on your current student loans. 

Moreover, if you have a strong credit profile and income, you may qualify for a lower interest rate. The advantage with lower interest rates is that it could potentially save you thousands or tens of thousands of dollars on your student loans.

With student loan refinancing, the result is a new student loan with a lower interest rate, single monthly payment, and individual student loan servicer. You can also choose a variable or fixed interest rate.

Student loan refinancing, although it varies by lender, offers more options for loan terms for student loan repayment.

You are allowed to repay your student loans over 5, 7, 10, 15 and 20 years by most student loan refinancing lenders.

However, if you want to pay off your student loans as quickly as possible, you’re better off choosing a shorter student loan repayment term. You can also choose a longer repayment loan term if you want more time to pay off your student loans.

A shorter repayment term has a higher monthly payment, less interest, and can pay off student loans faster.

On the other hand, a longer repayment term has a lower monthly payment, more interest, and can pay off student loans slower.

Student loan refinancing also simplifies your financial life with one student loan servicer, one monthly payment, and most importantly, a lower interest rate.

Unlike a federal student loan consolidation, only student loan refinancing can earn you a lower interest rate. A lower interest rate can help you pay off your student loans faster and can also mean big savings on your total student loan cost.

The main reasons to refinance student loans include:

● You want to save money through a lower interest rate.
● You have a strong credit score and a stable income.
● You want to quickly pay off your student loans.
● You want the flexibility of a variable or fixed interest rate.
● You don’t plan to use income-driven repayment plans or public service loan forgiveness.
● You are financially responsible and have a strong credit history.

Debt Consolidation 

You have two choices when it comes to student loan consolidation:
1. The first is the Federal Student Loan Consolidation which is a direct consolidation loan through the federal government.
2. The second is the Private Student Loan Consolidation which refinances student loans with a private lender.

While each strategy has its merits, each approaches student loan consolidation differently.

Eligible Loans For Student Loan Consolidation

1. Student Loan Consolidation with the federal government
2. The only student loans eligible for a Direct Loan Consolidation are Federal student loans. This includes:
a. Federal Direct Subsidised Stafford / Direct Loans
b. Federal Direct Unsubsidised Stafford / Direct Loans
c. Federal Direct PLUS Loans
d. Federal Direct Consolidation Loans
e. Federal Family Education Loans (FFEL)
f. Importantly, for a Direct Consolidation Loan, private student loans are not eligible.

Furthermore, with federal student loan consolidation, your interest rate does not decrease. Instead, it is equal to a weighted average of the interest rates on your existing federal student loans rounded up to the nearest 1/8%.

An organisational tool is the goal of federal student loan consolidation. It breaks down your federal student loans and combines them into a Direct Consolidation Loan.

Through federal student loan consolidation, the standard repayment term is ten years. There are also income-driven repayment plans such as REPAYE or PAYE that can extend your repayment term to 20 or 25 years.

The main reasons to consolidate student loans with a Direct Consolidation Loan are the following:

● It organises and simplifies student loan payments. A Direct Consolidation Loan, if you have multiple federal student loans, can provide you with a single, monthly student loan payment. You’ll also have one student loan servicer and payment date.
● It helps you participate in income-driven repayment plans. If you plan to use an income-driven repayment plan for your federal student loans such as PAYE, REPAYE, IBR or ICR, you may choose to consolidate your federal student loans.
● It has other federal benefits. Federal student loans are associated with certain benefits such as deferral and forbearance.


Here’s a quick overview to help you make a more informed decision:

A Direct Consolidation is an organisational tool. It has the same or slightly higher interest rate. It is associated with federal repayment plans.

Student Loan Refinancing is another form of organisational tool. It has a lower interest rate and flexibility. It can help you save money and pay off student loans faster.
Business Debt
You have a few options available to you as a small business owner when it comes time to make a change to the structure of your business debt. Each option aims to make your debt less of a burden over time and reduce its overall cost. 

If evening out your cash flow or knocking a bit off that lifetime cost of your loan (or loans) sounds appealing, you may want to consider either consolidating or refinancing.

Though you may hear the two terms used interchangeably, consolidating and refinancing are two different approaches to restructuring your business loans. 

Read further to explore the differences between these two strategies and the unique ways each can help your business.


Refinancing involves taking out a new loan to pay off an existing loan for a particular purpose—for instance, getting a better rate on a mortgage or business loan. 

This newer, better loan replaces your old loan, leaving you with more manageable debt. The term “better” in this case means a longer term, a lower interest rate, a more vital principle, or some combination of the things mentioned before.

Unlike consolidation, refinancing doesn’t require you to have multiple outstanding debts—you only need one existing loan to benefit.

Like debt consolidation, refinancing gives you the option to pay less for your borrowed capital over time and give your business the boost it needs to grow.

A refinancing loan with a longer term than your original loan, for example, can shave down your monthly payment, leaving you with more cash-on-hand each month to reinvest in your business. 

On the other hand, a refinancing loan with a longer term and larger principal allows you to maintain a monthly payment similar to your current one while borrowing more overall. 

You’ll save money over time as you qualify for a refinancing loan with a lower interest rate than your original investment.

Refinancing helps you make more significant strides while growing your business. Like consolidation, rather than short-term gains, it’s a big-picture strategy that prioritises the long-term health of your business.
Debt Consolidation 
Debt consolidation involves combining multiple loans into one. You, the borrower, would take out a new loan and use it to wipe out your existing debt, leaving you with only the newer loan to repay. 

You’d make a single monthly payment instead of several at different times and receive a separate billing statement.

Lapses in your cash flow are left with little room through multiple loans that demand numerous payments. Maybe your business underwent an emergency, and previously affordable loans now burden you. 

Or maybe you took out a costly loan (or two) in a pinch, and that steep APR is now hitting you hard. Or perhaps you merely want to pay less on your investments in the long run.

Whatever your circumstances, debt consolidation can help quiet the chaos and gather your loans into a single, manageable payment. 

If you have multiple short-term loans, you can consolidate using a loan with a longer term and buy yourself time. A loan with a competitive interest rate can help you save big by paying off your old, high-interest-rate loans.

Debt consolidation could be your best option if you’re juggling multiple loan products and suspect you could be getting a better deal.
In any situation, you should be prepared for any prepayment penalties from your original lender. Consolidating or refinancing, in this case, counts as “prepaying” and should figure into your decision. 

Always remember to move forward only if the value you’ll gain from restructuring outweighs the cost of the penalty.

Once you’ve evaluated your needs and determined it’s the right time to restructure, it’s time to choose a strategy: refinancing for a single loan, or consolidation for multiple ones. 

Either option is a proactive step toward strengthening your status financially, trading short-term problem-solving for more lasting solutions. You’ll be laying the groundwork your business needs to thrive for years to come.

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