Refinancing: An Introduction

First, let us look at refinancing. This is a term from the world of banking and commerce. When you take out a large loan to pay off all your former loans, you have refinanced your loan. This is usually done by pledging the same item of property as security which was pledged towards the previous loans. For example, your house may be under a mortgage which you have partially paid off. Now you take a larger mortgage on your house and pay off the previous due, and use the remainder to finance other expenses. Refinancing can also work with your college loan. Let's see how.

How Is Refinancing Relevant to Your College Loan?

There are a number of federal education loans which allow you to consolidate them into one large debt. And consolidation of college loan is synonymous with refinancing, as will be explained later. There are certain advantages to consolidation. First, you fixate your interest to an average of the several current rates you're already paying. The national and commercial rates may keep rising all around you, but you keep paying the same rates year after year.

Secondly, the complexity of your monthly financial liability is reduced quite a bit through refinancing your college loan. You don't need to keep track of several different accounts – you are done with paying one large installment that takes care of all your liabilities at once.

Refinancing = Consolidation

When you consolidate, what happens in effect is that that federal Dept of Education pays off all your existing loans, and becomes the sole creditor. So in real terms, you're actually refinancing your college loan by borrowing the outstanding amount from the government.

A Caveat against Refinancing College Loan

Refinancing your college loan sounds exciting and attractive, and indeed it can reduce your monthly load by a fair bit. But beware that it also increases the term of your loan, and you may end up paying more over the life of your loan.