Is It Time to Consolidate or Refinance Your Student Loans?

College is hard. Complex courses, in-depth research, challenging exams, long sessions in the lab and library. Whether it took you 3, 4, or 6 years, you really earned that diploma. Congrats!

Know what else is hard? Paying off college loans. If you’re like most graduates, you left school owing around $40,000. But it could be more – lots more. Those relentless payments of hundreds of dollars a month can cut into your ability to buy a house, finance a car, take vacations, and even pay your monthly bills.

But take deep breath. Help is at hand. There are ways to restructure your debt to lighten the load on your personal finances. One approach is through the federal government - this is called loan consolidation. The other is through banks, credit unions, or private lenders – this is called loan refinancing.

By taking the right steps, it may be possible to reduce your overall debt, down-size your monthly payments, or simplify the payoff process. Or maybe more than one of the above.

What does it take to carry out this task? A little knowledge. A little math. Given your success in the classroom, it’s nothing you can’t handle.

Loan Consolidation

If you borrowed for college costs, chances are that you have federal student loans. In fact, you might have one for each year – or even each semester – you were in college. A major reason why federal loans are popular is they historically have lower interest rates than private loans.

But even with that built-in advantage, many people decide to restructure their debt by consolidating two or more loans into a single federal loan. Here are a few things to know about consolidating federal loans:

• You can complete the process for a Direct Consolidation Loan online at studentaid.gov.
• You can only consolidate federal loans – including Direct Subsidized and Unsubsidized Loans, and PLUS Loans for students’ parents. This is important: You CANNOT include private loans in your Direct Consolidation Loan.
• You will NOT be able to reduce your interest rate. The rate for your newly consolidated loan will be the average rate of all your outstanding loans.
• You CAN reduce your monthly payments by choosing a payoff period that’s longer than the terms for your original loans. Consolidated loans have payoff periods of up to 30 years. (Note: By extending the loan term, you’ll increase the overall interest charges on the loan.)
• By opting for a Direct Consolidation Loan – instead of a privately refinanced student loan – you’ll remain eligible for federal programs that limit monthly loan payments for borrowers with modest salaries or that offer loan forgiveness to those who work in the non-profit sector for a certain number of years.

Loan Refinancing

Currently, private lenders account for 8% of all student loans. While that number may seem low, there’s actually a significant amount of private loan funds available.

Here are some key points regarding private student loan refinancing.

• You MAY refinance any combination of student loans. That is, you may refinance private loans only, federal loans only, or a mixture of both.
• You MAY be able to reduce your overall interest rate – but that’s not necessarily the case. While it’s possible that overall interest rates have decreased since you began borrowing for college, it’s also possible that rates have increased.
• As is the case with most consumer loans, your interest rate will be determined in large part by your credit score. It’s worth noting that, according to some estimates, that fewer than 10% of borrowers refinancing student loans qualify for the lowest advertised rate.
• As is the case with federal loan consolidation, you CAN almost always reduce your monthly payments by choosing a payoff period for the refinanced loan that’s longer than the terms for your original loans. This is important as well: You may also choose a shorter payoff period so you can eliminate debt faster and reduce your overall interest charges.

Bottom Line

So is this a good time to refinance or consolidate student loans? That depends.

If you’re banking on a lower interest rate, probably not. Consolidated federal loans are a break-even proposition as far as interest rates go. And with overall rates rising in recent years, there’s a low probability that private lenders can beat the rate on your existing loans. That said, rates are starting to slowly drop again, though they are still well above pre-pandemic levels.

If you’re looking to reduce monthly payments, that’s a better bet. You may be able to extend the repayment term for federal loans from 10 to 30 years. You may be able to get a 15-year term on private loans – long enough to trim current payments by hundreds of dollars a month.

And if you’re looking to simplify your finances a bit, that’s a pretty sure thing. By reducing a handful of loans to one monthly payment, you’ll have an easier time seeing the progress you’ve made on loan payments and judging how much further you have left to go.

Given all the challenges that post-college life throws at you, a little simplicity can be a good thing.