Consolidating vs. Refinancing Your Student Loans

No matter where you went to college, one thing most graduates have in common is a significant amount of student loan debt. In 2017, CNBC reported that 70% of college students graduate with student loan debt. That’s approximately 44 million, or one in four, Americans.

According to Nitro College, the average amount borrowed is $37,172. And that’s just the average amount; many Americans owe much more. The average law student, for example, borrows $140,616 to attain a law degree.

It’s no wonder many graduates report that paying back their student loans is a financial hardship. In fact, according to a 2012 Pew report, almost half of borrowers claim their student loan payments make it difficult to make ends meet, and only 27% of borrowers with outstanding debt claim to be living comfortably, according to a 2017 Pew report.

Moreover, there’s an opportunity cost involved with owing student loan debt. High monthly payments mean less money to put toward other things. According to the 2012 Pew report, 25% of borrowers report that their loan payments make it difficult to save for a home, 24% say they affect their career choices, and 7% claim loan payments have caused them to put off getting married or starting a family. A 2015 NerdWallet survey found that student loan payments could prevent borrowers from saving an average of $684,474 for retirement.

Options for Managing Student Loan Payments

If you’re one of the millions of student loan borrowers struggling with their monthly payments, there are a number of options for paying back your student loans. These include income-driven repayment (IDR) plans, loan forgiveness options, and student loan consolidation and refinancing.

Although there are several ways to reduce the amount you may need to borrow while attending college, if you’ve already borrowed the money and left school, your task now is to figure out the best way to manage the situation. To that end, it’s worth taking the time to figure out which program best suits your needs and can save you the most money in the long run.

If you owe more than $100,000, your best options are likely IDR plans and loan forgiveness. For borrowers who owe closer to the average amount of $37,172; however, these kinds of programs may be less beneficial. Nitro reports that the average monthly payment on $37,172 is $393 on a standard 10-year repayment plan. If that amount comes to 10% or less of your take-home pay, you’re not likely to qualify for much of a reduction to your monthly bill. Federal IDR programs calculate your monthly payment as 10% to 15% of your adjusted gross income (AGI) minus 150% of the poverty level for a family of your size.

Further, even if you’re able to reduce your monthly payment amount, you’re not likely to have a remaining balance to be forgiven in 20 years, the standard time frame for loan forgiveness. In the end, you’ll have paid back far more than you would have on the standard 10-year repayment plan.

If you fall into this camp, but you’re still looking for ways to lower your monthly student loan payment, two options for doing so are consolidation and refinancing.

Student Loan Consolidation

In student loan consolidation, you take multiple loans and combine them into one convenient monthly payment. After graduation, you may combine any of your federal student loans into one loan, with one monthly payment and interest rate, under the Federal Direct Student Loan Program (FDSLP). Essentially, the federal government issues you a single new loan for the total amount of all the old ones. That means that going forward, you’ll also have a single new payment rather than several.

You can also extend the length of the loan term to up to 30 years, depending on the total amount you owe. The interest rate on your new, consolidated loan is fixed for the life of the loan and is calculated as the weighted average of the interest rates on the loans you’re consolidating.

Pros of Consolidating

If you choose to consolidate your student loans, there are several potential benefits.

1. It Simplifies Your Payment

It’s not uncommon to leave school with a mix of several different federal and private loans. That means you could end up with several monthly bills, all with different minimum payments, different due dates, and potentially even different loan servicers.

Though all federal loans are backed by the federal government, they’re serviced by different organizations, such as Navient, Nelnet, AES, and Great Lakes. The servicer’s job is to act as an intermediary between you and the lender by collecting payments, offering customer support, and managing programs such as loan forgiveness and forbearance.

If you have several servicers, this can quickly become complicated. Keeping track of what you owe each month, when you owe it, and to whom can get confusing, and you may even miss payments trying to juggle it all. If you’d prefer to worry about only one servicer, one loan, and one monthly payment, consolidation allows you to do this.

2. Your Monthly Payment Might Be Lower

If you’re struggling to make your monthly payment, consolidation can help lower it by extending the length of time in which you’re required to pay back your debt. The default repayment period is 10 years, but when you consolidate, you can extend that up to 30 years depending on the amount you owe. That can result in a significantly lower monthly payment.

The trade-off, of course, is that by accruing interest over a longer period of time, you’ll end up paying back far more than if you’d stuck to the 10-year repayment schedule. But if your current monthly payment is straining your budget, this can give you a little more breathing room. And you can always pay more than the minimum once you’re earning more to get rid of your debt faster.

3. You Have a Fixed Interest Rate

If you have older federal loans, you may have some with variable interest rates. That means your payment and the interest on it can fluctuate with market conditions. If you’d prefer to have the stability of always knowing what your payment will be, as well as the ability to lock in one rate that won’t go up over time, loan consolidation can provide that.

When you replace your multiple loans with one single consolidation loan, you’ll get a fixed rate on the life of the loan because Federal Direct Consolidation Loans come with fixed rates only.

Also, although the laws on student loans are always subject to change, there’s currently no cap on the interest rate for government loans. That means any of your loans with variable interest rates could increase with no limit. So fixing your rate now could potentially save you money down the line. Keep in mind, however, that there’s no way to predict whether interest rates will fluctuate up or down over the life of your loans.

4. You Gain Access to Income-Driven Repayment Plans & Public Service Loan Forgiveness

All Federal Direct Subsidized and Unsubsidized loans are eligible for IDR plans, which include access to loan forgiveness programs such as Public Service Loan Forgiveness (PSLF). However, other types of loans must be part of a consolidation loan to qualify. These include subsidized and unsubsidized Stafford loans, federal PLUS loans for graduate and professional students, and Federal Perkins Loans.

When you consolidate your loans, these all become part of the FDSLP. That means that going forward, they will be eligible for IDR plans and loan forgiveness.

Cons of Consolidating

Although there are definitely benefits of consolidating your student loans, there are also some potential negatives to consider.

1. It Takes Longer to Pay Off Your Student Loan Debt

Although it’s certainly possible to consolidate your loans and stick to the standard 10-year repayment schedule, most borrowers don’t. Typically, those who consolidate their loans take advantage of longer repayment terms that can extend their repayment schedules to as long as 30 years. And while doing so might mean a far more attractive monthly payment, you should consider the costs before making this move. One of these is the opportunity costs of a bill that will be on your monthly budget for longer.

Many borrowers report putting off or even forgoing buying homes, getting married, starting families, or saving for retirement due to the need to divert money to student loan payments. Taking 30 years instead of 10 to repay your loans could mean as many as 20 extra years of money not being put into your retirement savings.

Interest rates work both ways. Even if you only put small amounts toward your retirement, you can reap massive benefits as a result of compounding interest over time. But if you put off saving for retirement until after you’ve paid off your loans, you could be missing out on a lot of money – as much as $684,474, according to the NerdWallet survey.

Moreover, CNBC reports that most student loan borrowers expect to be paying back their student loans into their 40s. That’s the age at which you’re likely to want to divert your money to other things – not just saving for retirement, but also buying a home, covering family expenses, and even potentially saving for your kids’ college educations.

In fact, CNBC reports that many student loan borrowers are still paying back their student loans into their retirement years. As you can imagine, that could significantly impact your quality of life in retirement.

2. It Won’t Save You Any Money

Even if you stick to the standard 10-year repayment schedule, consolidating your loans won’t save you any money. That’s because it doesn’t change the overall interest rate from your previous loans.

Your interest rate for your new consolidation loan is calculated by taking the weighted average of the interest rates on your current loans, rounded up to the nearest one-eighth of 1%.

A weighted average means that instead of simply adding everything up and dividing by the total number of items, some things are given more importance than others. In the case of your student loans, the interest rates on your larger loans are given more importance than those on your smaller loans.

For example, let’s say you borrowed $5,000 at 5.0% interest and $10,000 at 3.86% interest. To find the weighted average, the math would look like this:

[(5,000 x 0.05) + (10,000 x 0.0386)] / (5,000 + $10,000) = 0.0424

You then take the weighted average interest rate (4.24%) and round it up to the nearest one-eighth of 1%, which brings the total to 4.25%.

The idea is to keep your interest rate as close as possible to what you would have paid had you not consolidated your loans. As a result, consolidation won’t save you any money.

3. You Might Even Pay More Money in the Long Run

In addition to opportunity costs, there’s the simple fact that repaying a loan over a longer period means paying far more in the long run due to accruing interest. Frighteningly, this could amount to thousands, tens of thousands, or even hundreds of thousands of dollars depending on how much you owe. Even if the interest rate remains the same, you’ll end up paying back far more when you opt for a longer repayment term.

4. Your Principal Balance Might Increase

When you consolidate multiple loans into a single new one, any outstanding interest on your former loans becomes part of the principal balance on your consolidation loan. Because the interest owed is calculated based on the principal balance, that means you’ll start accruing interest on the new consolidation loan at a higher amount than you may have on your old loans.

5. You Might Lose Some Borrower Benefits

Although consolidation may give you access to some borrower benefits you may not have previously qualified for, the reverse is also true; you may lose some benefits, including interest rate discounts, principal rebates, or loan cancellation options.

If you haven’t yet consolidated, and you’re currently paying back any of your loans under an IDR plan, that means you’ve already made several payments that count toward potential loan forgiveness, including PSLF. Because consolidation means issuing you a whole new loan, you’ll lose credit for any payments you made toward loan forgiveness. In essence, your 10-, 20-, or 25-year forgiveness clock will start all over again.

You’ll also no longer qualify for special circumstances related to specific types of loans. For example, Perkins loans are eligible for forgiveness or cancellation if you meet certain criteria. But if you consolidate your loan, you’ll no longer have a Perkins loan; you’ll have a Federal Direct Loan – and as a result, you’ll no longer qualify for that program.

Keep in mind, though, that you don’t necessarily have to consolidate all your loans. You can choose to consolidate only some of them and leave out any loans that have benefits you don’t want to lose

6. You Can’t Be Strategic About Loan Payoff

Consolidation averages all your loans together to give you one new interest rate. But traditional methods for paying off debt as quickly as possible often involve paying off debt with the highest interest rate first. So if you consolidate all your loans, you can’t be strategic about how you pay off your debt.

If you want to consolidate, but you have one or more high-interest loans, you might want to consider leaving those loans out so that you can get the best possible interest rate on the rest of your loans. Then, put everything you can toward getting that high-rate loan paid off as fast as possible.

7. You Can’t Consolidate Private Student Loans

Only federal student loans are eligible for the Direct Loan Consolidation Program. If you have private loans you want to consolidate, the only way to do so is to refinance them. If you qualify to refinance your loans with a private lender, you can choose to combine everything – government and private loans alike – into one single loan. But you can’t do it through the federal program.

Student Loan Refinancing

Refinance Student Loans Marker Notebook Calculation Cash Math

Although some people use the terms “consolidation” and “refinancing” interchangeably, they’re actually quite different. First, if you have any private student loans, you can’t consolidate them with your federal ones through the Direct Loan Consolidation Program. However, it is possible to refinance everything together since refinancing involves private lenders.

Second, although consolidating your loans can have some benefits, it’s unlikely to save you money, while saving money is the whole purpose of refinancing. In refinancing, you take out a loan from a private lender that pays off your other student loans. You then have one single monthly payment and one single loan, similar to consolidation.

However, while consolidation takes the weighted average of your former interest rates to calculate your new one, the point of refinancing is to get as low an interest rate as possible, which will both help lower your monthly payment and result in less money you have to pay back over the long run.

Pro tip: If you’re thinking about refinancing your student loans, start your search at You’ll receive rate quotes from up to eight lenders within minutes. Plus, they’re offering up to a $750 bonus to any Money Crashers reader.

Pros of Refinancing

Here are the potential benefits of refinancing your student loans.

1. You Save Money

If you refinance your student loans, you could qualify for a lower interest rate. Depending on how much you owe, that can help you save thousands, or even tens of thousands, of dollars over the length of your loan.

For example, if you borrowed the national average of $37,172, on a 10-year repayment plan at 7% interest, you’d pay back $51,792. But if you refinanced at a 3% interest rate, you’d pay back a total of $43,072 over those same 10 years – a savings of $8,720.

2. Your Monthly Payment Is Lower

If you’re struggling to make your current monthly payment, refinancing your student loans can help you reduce it. You can qualify for a lower interest rate and potentially take advantage of a longer repayment term, either of which can lower the amount you have to pay each month.

For example, on the average student loan balance of $37,172, at 7% interest, you’ll be making a monthly payment of $432. But if you can refinance at a 3% interest rate, your new monthly payment will be $359 on a 10-year repayment schedule. If you chose to extend your monthly payment to 15 years, your monthly payment would drop to $257, freeing up $175 in your monthly budget.

This is where the opportunity cost of a higher monthly payment really comes into play. You’d be extending your repayment term slightly by going with a 15-year term, and it would cost you an additional $3,135 in interest. But if you took that extra $175 per month and invested in your retirement over those 15 years, you would invest a total of $31,500. At 9.8%, the historical average return of the S&P 500, that $31,500 would grow to $72,109 – an increase of $40,609, or more than double your original investment.

3. You Can Consolidate All Your Loans (Including Private Ones)

Unlike with the Federal Direct Consolidation Loan Program, if you refinance with a private lender, you can combine all your loans – both federal and private – into one new loan. That’s because private lenders are able to manage private money, whereas the federal government only deals with federal loans.

Cons of Refinancing

Despite the benefits of refinancing, there are some drawbacks worth noting.

1. You Lose Access to Federal Loan Benefits & Programs

If you decide to refinance all your loans together, you’ll lose access to government programs, including IDR plans, loan forgiveness, deferment options, and longer forbearance periods.

Though some lenders offer deferment for academic re-enrollment and military deployment, as well as forbearance options for financial hardship, deferment and forbearance periods are typically much shorter than those offered by government programs.

Further, should you decide to take a pay cut for a job with better working conditions or leave the workforce to care for your family, you’ll no longer have access to IDR plans, which calculate your monthly payment based on your income and family size. And once you refinance, there’s no going back. Your old loans will have been paid off by the new loan and, therefore, no longer exist.

For that reason, it’s important to think carefully about whether you really want to refinance your federal student loans. Although it could potentially save you a lot of money, it will also impact your future options.

2. It’s Difficult to Qualify

Student loan refinancing is notoriously difficult to qualify for. Not only do most lenders require credit scores upward of 700, but many lenders also require borrowers to have well-paying jobs. In other words, if a lender is going to take on the risk of lending you tens of thousands – or even hundreds of thousands – of dollars, they want to make sure you’re worth that risk.

All this means that you may only qualify for refinancing if you’re already in a good financial position. So if you’re looking into refinancing as a way to lower your monthly payment because you’re struggling to make it, you probably won’t find the answer in refinancing. You’re better off looking into IDR plans instead.

Which Is Best for Me?

As with anything, when determining which option makes the most sense for you, it’s essential to carefully consider all the angles. For example, refinancing could potentially save you thousands of dollars over the long term, but consolidating gives you access to government programs such as IDR plans and loan forgiveness.

Also, is it more important to you to pay off your student loans as quickly as possible or to lower your monthly payments? Which would go further to improve your quality of life and help you meet long-term financial goals?

When it comes to paying back your student loans, the math is important, but there’s more to it than that. You likely have other financial goals you’re working toward, such as buying a home or starting a family. So for you, it may align better with your goals to have a longer repayment term but lower monthly payment. Or it might make more sense to pay your loans off as quickly as possible so you’re not still paying them back 30 years from now.

Think about where you see yourself in the next 10, 20, or even 30 years and how your student loan payments may affect those long-term plans. Ideally, you borrowed the money so you could make a better life for yourself and your family. So the question now is: Which method will help you to do that better?

In the end, it pays to look at every possible option for managing your student loans and choose the one that best works for your situation.

There’s one more thing to consider when it comes to consolidating or refinancing your student loans, and that’s to beware of student loan scams. In recent years, many scammers have arisen who prey on desperate borrowers struggling to make their monthly payments.

These scammers offer to “help” you by consolidating or refinancing your student loans for a fee. However, consolidating your federal loans is completely free, and you can apply online in less than 30 minutes.

If you opt to refinance instead, you can compare offers from multiple lenders before deciding on one. Further, most refinancing lenders – and certainly the best ones – don’t charge any fees. So if you’re offered student loan consolidation or refinancing for a fee, run in the other direction. It’s a scam.

Are you considering student loan consolidation or refinancing? Which one seems like the better option for your situation?

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