Should you consolidate or refinance your student loans?

Making 8 different student loan payments at varying interest rates to both private and federal institutions is the reality for most millennials today, and I'm willing to bet it feels like a giant shit storm.

Nobody said adulting was going to be easy, but sometimes it feels like we've been a little mislead. Between the lack of financial literacy education in our school system and the golden gift of making an $80,000 purchasing decision at the age of 18, the majority of us have entered the “real world” feeling blind-sided by life's financial responsibilities.

Now, we don't need a pity party or a free pass, we just need some guidance on what the heck our options are and how to make a damn decision.

Today, we're focusing on how to manage all those student loan payments that are driving us crazy every single month.

What are your consolidation and refinance options and are they right for you?

Student Loan Consolidation

Loan consolidation allows you to combine multiple student loans into one loan so you only have to make one monthly payment at a single fixed interest rate.

If you're having difficulty making your monthly payments each month, consolidation may also lower these payments by extending the repayment period by up to 30 years.

However, if you extend the repayment period and only ever make the minimum monthly payment, you will end up paying more, sometimes double, in interest over the life of the loan.

Only extend the payment terms if you're struggling to meet those monthly payments. Then, when you have a windfall of money, apply the extra dough to the principal of your loan(s).

Federal Student Loan Consolidation

You can consolidate your federal student loans when your school enrollment drops under part-time status and your federal loans are in the grace period or repayment. Note: Parent PLUS loans cannot be consolidated with your other federal loans. <sad face>

You cannot consolidate your private loans with federal loans in the preferred method.–Through the Direct Loan Consolidation Program.–It is possible to combine your federal and private loans, but that's considered refinancing – which I talk about below, and have a few warnings about.

With federal student loan consolidation your federal loans will be combined into one loan by the federal government and will have one fixed interest rate which is made up of the weighted average of the interest rates from your old loans.

So you won't be saving any money, but you will manage to get your bills/payments down to a single one each month for those federal loans.

If you do have a variable rate loan, consolidating can switch it to a fixed rate which could save you from unpredictable rate hikes in the future. (The last variable rate loans were dolled out in 2006. Ever since, we've seen fixed rate federal loans.)

And, as mentioned above, you may be able to lower your monthly payments – but this will not save you any money in the long run. It will cost you more money in interest.

Private Loan Consolidation

Like federal student loans, you can also consolidate your many private student loans and receive the same benefits of one single loan payment, a single fixed interest rate, and a lower monthly payment if needed.

However, when you consolidate your private loans, you do not simply receive a weighted average of the interest rates from each of the loans.

Instead, the bank or private institution responsible for consolidating your loan will determine a new interest rate based on your credit history (how well you have paid debt and other financial obligations in the past).

Preferably, this will be a lower rate than the rates you were paying in the past, but you will want to make sure your credit score and reports are up to snuff before diving into your private loan consolidations.

You might also like: An Interview With The Broke Millennial and The Biggest Credit Score Myth

Essentially, when you consolidate your private loans with a private institution, you are refinancing them.

This is why you hear the words “consolidation” and “refinancing” used interchangeably when talking about student loans. Though, there is a significant difference.

Student Loan Refinancing

(And Private Consolidation vs. Federal Consolidation)

As we mentioned, you can consolidate your federal loans and consolidate your private loans, but private loan consolidation is refinancing.

Student loan refinancing is when you use a single private loan to pay for your existing loans (can be one or more) preferably at a lower interest rate.

With student loan refinancing (at a lower interest rate) you can:

  1. Lower the amount of your monthly payments.
  2. Streamline your payments into a single monthly payment.
  3. Shorten your repayment period to pay off your loans faster.
  4. Decrease the amount you will spend on total interest.
  5. Opt for a variable interest rate loan, assuming you are determined to pay your loan off at lightning speed.

Only consider refinancing if you have significantly improved your financial situation (credit score) and get an interest rate that is lower than the weighted average of your current loan's rates.

You might also like: The Deal With Student Loan Debt – an Interview with Natalie Bacon

Some institutions will allow you to refinance your private and federal loans into one loan repayment. But be warned! When you refinance your federal student loans, they become private loans, and there are some federal benefits you will lose.

Federal student loans offer:

  • Lower interest rates than your private loans.
  • Public-Service Loan Forgivenes.
  • Income-based repayment plans.
  • Deferment and Forbearance
  • Loan forgiveness if you die… (sorry, but we all do it)

It's important that you read the terms of your new loans very carefully to understand what may change when refinancing your federal and private loans into a new private loan. Many of the above federal protections will go away as private lenders are less forgiving.

There are many options to make your student loan repayments easier and less stress-free, but you should consider the costs and the benefits on how each method may impact you. Not only does streamlining your payments have financial benefits, but they may also have significant mental, emotional, and mindset benefits around how you handle your finances.

Final thoughts: Don't be paralyzed by your options. The worst thing we can do when it comes to our money is not take action.

Need someone to knock around your finances with? Check out my girlfriend's money coaching program (at least jump on a 30-minute call with me). We will come at your money management as a team to identify the gaping black holes where your money is disappearing to, set up a system to automate your finances, and start planning for your future so you can stop freaking out about it.