Are you considering refinancing your student loans? The average college graduate in 2015 left school with a little over $35,000 in student loan debt. For those with professional degrees, such as law or medicine, balances are often much higher—sometimes averaging around $150,000 to $200,000. That level of debt can feel overwhelming, so it’s important to understand the options available for managing and reducing what you owe.
One useful strategy many borrowers explore is combining or refinancing student loans. Consolidation and refinancing are two different approaches, each with its own advantages and disadvantages. Many people never consider these options simply because they don’t know about them or assume they aren’t eligible. Below is an overview of both approaches and factors to weigh before deciding which path—if any—is right for you.
Related: How I Paid Off $40,000 In Student Loan Debt In 7 Months
Consolidating Student Loans – Positives And Negatives
Loan consolidation means combining multiple loans into a single loan and a single monthly payment. For federal student loan borrowers, a federal Direct Consolidation Loan is an option. While consolidation usually doesn’t lower the overall cost of your loans, it can simplify repayment by replacing multiple bills with one, easier-to-manage payment.
Many graduates juggle several separate loans—sometimes five or more. That increases the risk of missing a payment or overlooking variable due dates. Consolidating federal loans can reduce administrative hassle and make budgeting simpler, but it typically does not reduce the interest rate on existing federal loans; instead, the consolidation loan’s interest rate is a weighted average of the underlying loans rounded up to the nearest one-eighth of one percent.
Pros of consolidation:
- Simplified payments—one monthly bill to manage;
- Access to alternative repayment plans under federal programs in some cases;
- Potentially lower monthly payments if the consolidation extends the repayment term.
Cons of consolidation:
- Possible loss of borrower benefits tied to the original loans;
- Potentially higher total interest paid if the loan term is lengthened;
- Limited or no interest rate reduction for federal loans through consolidation.
Refinancing Student Loans: Positives And Negatives
Refinancing takes your existing loans and pays them off with a new loan from a private lender. This new loan may offer a lower interest rate, a different repayment term, or both. Refinancing can be especially attractive if your credit score or financial situation has improved since you first borrowed.
Refinancing can lower your monthly payment by securing a lower interest rate or longer repayment term, or it can help you pay off debt faster by obtaining a lower rate and keeping or shortening the term. It often also simplifies your finances by combining multiple loans into a single payment.
Benefits of refinancing:
- One monthly payment to simplify finances;
- Potentially lower interest rates, especially for borrowers with improved credit;
- Potentially lower monthly payments if you choose a longer term or lower rate;
- Opportunity to change from variable to fixed rates (or vice versa) depending on lender options.
Important caveats when refinancing federal loans:
- When you refinance federal student loans with a private lender, you permanently forfeit federal loan protections and benefits. This includes income-driven repayment plans, deferment and forbearance options, and federal loan forgiveness programs, such as Public Service Loan Forgiveness (PSLF) and certain teacher loan forgiveness programs.
- If you might benefit from federal programs in the future—such as income-based repayment, public service forgiveness, or temporary relief options—refinancing could remove important safety nets.
That said, refinancing can still make sense for many borrowers. If you don’t anticipate needing federal loan benefits, and if a private lender can offer a significantly lower rate or better terms, refinancing can reduce interest costs and shorten the time it takes to pay off debt.
Key Considerations Before You Decide
Before taking any action, review these points so you clearly understand the trade-offs between consolidation, refinancing, and staying with your current loans:
- If you are eligible for federal benefits like deferment, forbearance, income-driven repayment, or loan forgiveness, carefully consider whether giving those up is worth the potential savings from refinancing with a private lender.
- Watch out for variable interest rates offered by private lenders. Variable rates may start low but can rise over time. If you want predictability, consider refinancing into a fixed-rate loan.
- Consolidation often increases the repayment term, which can lower monthly payments but may lead to higher total interest paid over the life of the loan.
- If your credit score or income has improved since you took out your loans, shop around. You may qualify for better interest rates or more favorable terms through refinancing. Compare offers from multiple lenders and read the fine print about fees, repayment options, and rate adjustments.
- Consider the effect on your financial goals. Lower monthly payments can free up cash for savings, investments, or emergency funds, while a lower interest rate can shorten your repayment timeline and save money overall.
Deciding whether to consolidate, refinance, or leave your loans as they are depends on your career plans, financial situation, and tolerance for risk. If you work in public service or expect to rely on income-driven repayment or forgiveness programs, the benefits of keeping federal loans may outweigh potential savings from refinancing. Conversely, if you have stable income, improved credit, and no need for federal protections, refinancing could reduce your interest costs and simplify repayment.
Do you have student loan debt? What is your plan to pay it off, and are you considering refinancing?