This is a guest post from David Chen. David is a blogger at MillennialPersonalFinance.com. David loves a good side hustle, sushi, and CNBC. David hates student debt and frozen foods. David is working to build up his blog following in 2017.

When I realized I was paying higher interest on my student loans than I needed to, I decided to take the road to refinancing. If I didn’t, I’d have been paying on my remaining balance in student loan debt much longer than necessary. In my case, I had multiple student loans and financed them into a single loan with a lower overall interest rate. Before I did this, I had to learn how a student debt refinance and consolidation worked so I could make the best decisions. The following information is what I found.

Is Consolidation a Good Idea?

There are certainly drawbacks to consolidation, but it highly depends on the type of loan you have. You have either a federal or private student loan. If you have a federal loan, the amount of time you have to pay back the loan is set and the interest rate can’t exceed a certain percentage. You are also not penalized if you decide to pay back the loan in advance.

If you have private loans, the lender set the terms when you acquired them. This means variable interest rates and fees, depending on the lender. You don’t get the benefits of federal consolidation when you have private loans. Nonetheless, there are some benefits to consolidating as a part of refinancing:

  • You only have to make one payment because there is only one loan.
  • The interest rate is fixed, so you don’t have to deal with variable rate loans that keep changing on you.
  • You can extend the repayment period if you want to, but you can use consolidation to shrink the size of the debt for faster repayment.

Why You Might Not Want to Consolidate or Refinance  

If you are close to having your loans paid off, now isn’t the time to consolidate. Simply keep doing what you are doing and enjoy being free of student debt when it’s paid off. If you are going to lose certain federal loan benefits that work for you, you may not want to refinance. The primary goals of consolidating and/or refinancing your loans are to save money and improve your financial situation. However, consolidating and/or refinancing may not be the best idea in some circumstances.

How a Student Debt Refinance Works

You can use direct loan consolidation to consolidate federal loans. If you have more than one private loan, you can turn to a private lender to consolidate the loans. If you have just one loan, you can turn to a lender to refinance at a lower interest rate. It all sounds very simple. However, there’s a lot more to it than you might realize.

When you consolidate federal loans, you are given multiple options, and your payments can be based on family size and income. The interest rate is an average of the federal loans being consolidated. You will be given a repayment total, but the remaining balance may be forgiven once the loan term is complete in some cases. (Note: you may have to pay taxes on the amount forgiven)

When consolidating with a private lender, your interest rate can be lowered, which can make the monthly payments lower. This is usually possible because the loan term is lengthened. A longer term can mean a larger overall repayment, despite the lower interest. The private lender makes decisions for you regarding repayment amount and the monthly payment.

Of course, you have to determine if you are eligible for federal or private consolidation. In many cases, the loan type makes this determination for you. Once you understand your options, you can then move forward with the route that is going to work best for you.

When consolidating federal student loans, you have to apply through the Direct Consolidation Loan. I was eligible for consolidation, so all my loans could have been consolidated into one payment, term, and interest rate with the government. I also would have been able to do an income-based repayment program. The process was relatively easy, but I decided on another option.

A Private Student Debt Refinance

During my research, I gathered a lot of valuable information on this option, as well. I know people who have done it, and they were happy with the lower interest rate. I also know college graduates who have consolidated federal and private loans through private student loan refinancing. This type of consolidation does require a good credit score, about 757, and a low debt-to-income ratio, and a stable income. It is harder to qualify for private refinancing because it involves taking out a new loan that pays off the old loan. I chose to refinance with a private lender since I was eligible, and it saved me some money on interest!

Of course, when you consolidate your federal loans into a private one, you lose all the federal benefits and relief options that come with those loans. If you think there’s a chance you might need those later, that’s certainly something to consider in your decision.

What you do is entirely up to you, depending on the loan type or types, your interest rate, and how much you owe. Make sure you weigh the pros and cons of each option available to you so you can make an informed choice about the consolidation and/or refinancing of your student loans. 

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