Navigating student loan debt can be a stressful and overwhelming process, filled with financial terminology that is confusing, and unfortunately, not part of a course that’s taught in medical school. This process is naturally exacerbated for those in the medical community who face a set of unique challenges, such as high student debt.
Two common terms that come up when you Google student loans— refinancing and consolidating—are complex, nuanced options and many don’t know which is best for them. If you are looking up those terms, you are already on the right path because it means you want to make your student loan management process easier to navigate. The good news is that both refinancing and consolidation can help you on your financial journey and career as a doctor, and we’ve broken down what they are and how they can help.
Diving in: The Difference Between Refinancing and Consolidating
If you are unsure about the difference between refinancing and consolidating, know you are not alone: according to recent research we conducted at Laurel Road, 42% of Gen-Z and Millennial respondents did not know the difference between refinancing and consolidating student loans. While these terms may seem similar, there are some important differences that everyone with student loan debt should be aware of.
What Is Student Loan Consolidation?
Consolidating student loans is when you combine federal loans into a single payment and switch from paying several loan servicers to paying just one. These loans have new terms, such as a lower monthly payment, but may also have a longer repayment period, which could mean paying more over the life of the loan. Additionally, you may find that the new rate, which in most instances can be a blended average of your original rates, doesn’t actually serve as an opportunity to lower your existing rate. It’s important to note that consolidating is limited to federal student loans. If you only have private student loans, then consolidating isn’t an option for you.
What Is Student Loan Refinancing?
Available for any kind of student loan you have, refinancing is when you combine your existing debt into one single, new student loan with a private lender, like Laurel Road. You apply for a loan through this lender, who then pays off your existing student loan(s) and replaces it with a new loan, with new terms. The result is that you’re now working with one lender, one payment, a new interest rate, and potentially a different payment duration. In some cases, refinancing offers more loan term options for repayment than consolidation, and borrowers may be able to secure a lower interest rate.
To Refi or Not to Refi: Your Refinancing and Consolidating Options
In considering whether to refinance or consolidate your loans, it’s important to consider your goals and needs, as both refinancing and federal consolidation have their pros and cons.
Consolidating federal loans today may not save you the amount of money that it used to. Students who took out federal loans, such as the Federal Stafford and Plus loans before 2006, had variable-rate loans, and consolidating them through a federal program was a way to get a lower rate. As explained by Connecticut’s Office of Legislative Research, rates for these federal student loans changed from variable to fixed as a result of the 2005 Deficit Reduction Act. This is why consolidation works out differently for new student loans as of 2006—consolidation doesn’t provide a way to capture a lower rate for these later loans, because their rates don’t fluctuate. Instead, the government programs establish the new rate by averaging the rates of the loans being combined. The consolidated student loan may have new terms, such as a lower monthly payment, but it may have a longer repayment period, which could mean paying more over the life of the consolidated loans.
Another consideration when consolidating federal loans is Public Service Loan Forgiveness (PSLF), a government-funded student loan program. With PSLF, you can take on a full-time job in the nonprofit sector or other qualifying job within public service, and in exchange the remaining balance of your loans can be forgiven after making 120 qualifying payments. This could benefit those using income-based repayment options (available on federal loans) to repay their loans.
On the other hand, refinancing student loans may provide an opportunity to lower interest rates and reduce the total amount you pay over the life of the loan in interest. The process is simple: first, you should look for a lender offering terms better than the ones you have—this could be in the form of better rates, a shorter repayment term, or both. Then you apply for a new loan with them. If approved, you’ll obtain a new loan, and the lender pays off your existing student loan. Also, because you’re able to refinance your student loans more than once, if your credit score improves or you get a raise, it may make sense to refinance again.
It should also be made known that by refinancing your federal student loans to private ones you lose access to benefits such as the COVID-19 payment suspension and 0% interest rate, income-driven repayment plans, Public Service Loan Forgiveness, federal forbearance, and other advantages federal borrowers have access to. If you have a stable job and income, a lower interest rate may be more attractive to you than these benefits. Keep in mind that federally held loans offer government protection, so when determining if refinancing is right for you, evaluate what’s best for you before refinancing. In the event you have private student loans with higher rates than what’s currently available, you should be exploring the option of refinancing.
Taking the Next Steps in Your Financial Journey
Now that you know the difference between refinancing and consolidating student loans, you need to determine the best approach for your financial situation. Something to note when considering these two options is that consolidating and refinancing student loans is not an either-or situation—you can consolidate some student loans and refinance others.
What’s most important is finding a method to help you manage student loan debt in a way that alleviates time and hassle, and saves money. These are all critical pieces to getting your financial journey on track and off to a strong start, and we know from our recent survey with The White Coat Investor that two-thirds (66%) of doctors are planning to be more financially focused this year to benefit their career and personal financial security compared to 2020.
Consider your options, and if you do decide to refinance your student loans, look for a digital solution that’s built for your needs, like our recently launched Laurel Road for Doctors offering, a suite of financial and banking products and services uniquely designed for physicians and dentists. This new offering includes specialized rates on student loan refinancing and banking options that help you grow what you save, such as a high-yield savings account.
Ultimately, whether you choose to refinance or consolidate your student loans, you are making a decision that will help with your debt management and make your payment process easier. Look into your options for both and go from there, but make sure to keep your savings and financial goals top of mind throughout.
[Editor's Note: This is the first of five sponsored posts from our Platinum ($7500+) sponsors of the WCI Scholarship. Laurel Road is a long-time partner of The White Coat Investor and has helped thousands of readers refinance their loans with great service and rates. Thank you for supporting those who support this site and especially the scholarship. 100% of proceeds go to the scholarship winners.]
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