Figuring out what to do with your student loans after you graduate can be confusing.
Do you consolidate your student loans?
Do you refinance them?
Do you do nothing and just pay according to your original terms?
Here’s what you need to know.
What Is Student Loan Consolidation?
Student loan consolidation takes all of your federal student loans and rolls them into one fixed rate loan.
Instead of making a payment for each loan you took out, you now only need to make one payment each month for your consolidated federal student loan.
Private student loans cannot be consolidated through the government program.
Basically, the balances you owe are all combined and the new interest rate is based on a weighted average formula rounded up to the nearest 1/8th percent. If that sounds confusing, see the example below.
When you consolidate, you can choose the length of repayment. The lengths range from 10 years to as long as 30 years, but you can always pay the loans off faster if you wish.
Here’s an example of how to figure your new interest rate after you consolidate federal student loans.
Will has 3 federal student loans. He owes $30,000 on loan 1 at a 6.8% interest rate, $10,000 on loan 2 at a 4.4% interest rate and $20,000 on loan 3 at a 5% interest rate.
To find the interest rate of the consolidated loan, you multiply the amount owed times the interest rate for each loan and add up the three numbers you come up with.
In this case, $30,000 times 6.8% = 2,040, $10,000 times 4.4% = 440 and $20,000 times 5% = 1,000. When you add those results up, you get 3,480.
Divide the calculated total by the total amount of loans being consolidated. In this case, you’d divide 3,480 by $60,000 to get an interest rate of 5.8%.
However, the program rounds the interest rate up to the nearest 1/8%, so your interest rate would end up being 5.875%.
When to Consider Student Loan Consolidation
Consolidating makes sense if you have many federal loans and you still have at least a few years of repayments to make on your debt. If you’re close to paying off your loans, it probably isn’t a good idea to consolidate and lengthen the term of your loans.
Consolidating makes it so you don’t have to worry about making multiple payments each month and can reduce the risk of you accidentally missing a payment. While the interest rate on your loans may slightly increase, the simplicity could be worth it in some cases.
What Is Student Loan Refinancing?
If consolidation doesn’t sound like a great plan for you, you may want to look into refinancing your student loan debt.
Basically refinancing requires you to take out a new loan, but the proceeds from the loan are used to pay off your old student loans immediately. You can refinance both federal and private student loan debt in most cases.
Refinancing gives you the chance to lower your interest rate, but you may be giving up some benefits to do so.
If you have federal student loans, you’ll lose any privileges or special treatment you had on them. Any repayment programs that only apply to federal loans, such as income based repayment, may not be available on private loans.
When to Consider Refinancing
Refinancing is a great way to lower the amount of interest you pay on your student loans. If you had unfortunate timing and had to take out loans when interest rates were higher, you can now take advantage of the lower rates available today.
However, if you have low fixed rate student loans you may not be able to find a better interest rate by refinancing. In that case, just stick with the loans you already have.
Your current loans may be fixed rate while many refinancing programs only offer variable rate loans. If you’ll be paying back your loans for many years, interest rates may increase, raising the interest rate on your variable rate student loans, too.
When to Leave Everything Alone and Just Pay Them Off
Sometimes it doesn’t make sense to consolidate or refinance your student loans. If you’re within a year or two of paying off your loans, the small amount of savings in simplicity or dollars may not be worth the hassle of consolidating or refinancing your loans.
Only you can make that decision, but don’t feel like you need to refinance or consolidate just because you have the ability to do so.
Do you have student loans? Have you consolidated or refinanced them? If so, share your experience in the comments below. If not, explain why you haven’t.