Consolidating default student loans

Posted by / 19-Oct-2017 01:03

In short, the term “consolidation” is used to describe the process of combining multiple loans into a single loan while the term “refinancing” is used to describe the process of using a more advantageous loan to repay an older loan.

While refinancing is often used in other realms of finance (like mortgages) to describe repaying a single older loan with a new loan, consolidating with a private loan technically includes refinancing as well since the term and interest rate of the new loan are different from the old loans.

The following table illustrates how a weighted average works.

In this example, there are three students that each have three loans.

We then detail a step-by-step guide to using and choosing consolidation loans.

The new interest rate can be lower or higher than the weighted average of the old loans and can be fixed (the interest rate won’t ever change) or variable (the rate changes based on the market conditions).

Private and federal loans can both be refinanced with a private consolidation loan.

Some lenders require that the borrower’s debt-to-income ratio be below a certain threshold.

Many lenders also factor in a borrower’s employment stability and prospects – they may even have minimum annual income requirements.

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Getting a federal consolidation loan isn’t usually considered as “refinancing” since the interest rate of the new loan is equal to the weighted average of the loans being consolidated.