Differentiating Between Refinancing And Payment Reduction

Knowing Your Terms

When it comes to finances, loans in particular are silhouetted in terminology which can be difficult to understand. Even when you think you’ve got your head wrapped around it, there are usually aspects of financial situations which can be quite confusing.

When it comes to options for student loan consolidation and payment reduction programs, points out that, “Contrary to popular belief, federal student loan refinancing and federal student loan consolidation aren’t one and the same.”

Refinancing And Payment Reduction

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If you’re refinancing a loan, this usually means that you’re taking out a new loan with an interest rate that is lower in order to pay off previously existing loans. Here’s the advantage: if you’ve got a loan, or a number of them, the longer it takes you to pay them, the higher the interest goes—in many cases.

Depending on your credit, you may be able to source a fixed-rate loan, but at the student level, unless you’ve already got substantial collateral or a well-to-do cosigner, this likely won’t be the case. As a result, interest will start accruing very soon, and it will likely continue to compound.

When you refinance, you’re able to basically pay off the same amount, but without quite so much interest. The refinancers send your initial creditors payment, and then you are paying those who helped you refinance rather than the initial providers of the loan. It’s kind of like “passing the buck”, if you will.

But you’ve got to be careful; certain refinancing agencies aren’t necessarily trustworthy. Be sure and do your homework on a refinancing organization before you commit to their assistance. You want to read the fine print on their offerings. Additionally, a Google search can help appraise you of hidden conditions.


Consolidation, by contrast, converts one or several federal student loans into a single loan. Think of it as a combining agent. Granted, this is very similar to the refinancing solution, but it isn’t quite the same. Usually a consolidated loan has a longer term, meaning you’ll pay more interest by the end of the loan.

With a consolidated loan, you’re essentially “starting from scratch”. You’ve got new loan terms. Meanwhile, refinancing retains the old loan terms, and the interest is lower.

Of course the best solution is to avoid taking out a loan altogether, but this may not be possible. If you’re looking for payback options, that ship’s sailed. What’s integral is getting that loan paid back as expediently as possible.
You must always be paying back more than the appended interest, or you’ll never get it whittled down. A good strategy is starting to pay it back ahead of the grace period.

If you’re not properly diligent, you could very possibly be paying off your student loan for decades. And if you did something “creative” like chase after a degree in poli-sci, you’ll be kicking yourself the whole time.

There’s Still Good News

The good news is, there is work out there, and there are options which can make the burden less burdensome. Debt is a serious issue in America today, and that from the federal level. Many companies exist to help those in need. But you must be wary. Some are looking to “scrape more off the top”, as the saying goes.

This is one reason to avoid most consolidation agencies; many aren’t really about helping you pay back your loan, their actual aim is to make you pay longer, and thus get more money from you from the additional interest you’re beholden to. The poorer you are, the better a target you’ll be for such agencies. So be careful.

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Kevin Bennett

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