How Do You Refinance or Consolidate Student Loans?
Understand the difference between a consolidation loan, a debt management program, and debt negotiation. Companies that claim to be able to help you lower your payments or get out of debt quickly may appear to be offering consolidation loans–they may even have the word “consolidation” in their names–when in fact they use methods such as debt management, settlement, or even bankruptcy. There are major differences between these options.
What is a Consolidation Loan?
A consolidation loan is simply a loan that pays off your other loans. Once you consolidate a loan, you owe that money to the new lender, not to the original creditor. A consolidation loan may lower your monthly payments, either by reducing your interest rate or by extending the length of time for repayment, but it pays off the other creditors completely. Consolidation loans may temporarily blemish your credit, but generally to nowhere near the extent of debt management programs or debt negotiations.
Debt Management
Debt management programs may also reduce your payments, but they work differently. A debt management agency acts as a middleman between you and your creditors and tries to negotiate a reduction in the interest rates or fees on your loans. You then pay an agreed amount to the debt management or credit counseling agency, and they disburse the payment (usually minus a fee) to your creditors. Participation in a debt management plan usually shows up on your credit report, and may adversely affect your credit rating.
Debt Negotiation
Debt negotiation is the act of settling a debt for less than what you owe. You pay a part of what you owe to a creditor, and the creditor writes off the rest of the debt. Credit card companies often offer lump-sum settlements as a way to recoup part of their losses. While you end up owing less, a settlement will bruise your credit, badly. Worse still, third-party companies that offer debt negotiation have been known to disguise their practices as consolidation, and these companies frequently charge exorbitant fees while simply passing along payments to your original creditors, sometimes failing to even negotiate any difference in your repayment terms.
In order to consolidate your loans, ALL you have to do is call the LENDER (whatever bank you took it from). If you don’t know, you can call the financial aid office at the school where you took out the loan and ask them the name of bank.
Below are the steps you need to take to refinance your student loans. This is after you have consolidated your student loans
- Make sure your credit is in good standing. This is essential for getting more favorable terms.
- Get a copy of your free credit report. This can be achieved online through one or all of the three major agencies, such as Equifax, Experian and TransUnion. Review it and make sure to fix any problems.
- Consolidate your federal loans and private loans separately. Compare rates from different lenders. Shop around, check the Internet, your bank, as well as your original lender.
- Work with your lenders to refinance your loans. Extend your repayment period, lower your interest rate or consolidate your payments into one monthly bill according to your needs.
- Research your options. You can consolidate private loans and federal loans together, but this usually yields less favorable terms.
I hope this gives you an idea what to expect when you refinance or consolidate or do them both. Good luck !!
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