Financial Counseling Certification Program (FiCEP) Practice Exam

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What does student loan refinancing involve?

Taking out a new loan to pay off existing loans
Consolidating multiple loans into a single payment
Forgiving a portion of the debt
Deferring loan payments temporarily

The correct answer is: Taking out a new loan to pay off existing loans

Student loan refinancing involves taking out a new loan to pay off existing loans. This process typically entails obtaining a loan with more favorable terms, such as a lower interest rate, which can lead to reduced monthly payments or overall interest costs over the life of the loan. When refinancing, borrowers usually seek to improve their financial situation by transitioning from higher-interest loans to a new loan with better interest rates or repayment terms. This means that the new loan directly pays off the old loans, replacing them, which can potentially result in significant savings for the borrower if they qualify for a lower rate. While there are related options like consolidating loans into a single payment, refinancing is distinct in that it focuses on obtaining a new loan rather than simply merging existing loans. Forgiving a portion of the debt or deferring payments do not involve taking on a new loan but rather altering the repayment conditions of an existing loan, which is separate from the refinancing process itself.