Should You Consolidate My Student Loans? Here's what the pros say

Should I Consolidate My Student Loans?

Should I consolidate my student loans? The pros answer.

Student loan consolidation can sound pretty enticing. The prospect of fewer monthly payments, lower APR, or freeing up some of your monthly cash flow may help you realize your financial goals. Depending on how you consolidate your student loans, you may even be able to achieve significant savings in the long run by paying off your loans faster with a lower interest rate.

While there are a lot of benefits to be had from student loan consolidation or refinancing, there are still some potential drawbacks that you will want to consider before you move forward. People consolidate student loans for different reasons, so what worked best for your brother or your best friend may not be the right approach for you.

Kimberly Schrant, financial coach and CPA, who runs KansasMoneyCoach.com, advises, “Everyone’s life is different, so there is not a cookie-cutter approach to this part (or any part) of a personal financial plan.”

With this in mind, let’s look at some of the details the pros suggest you consider before you make up your mind.

Your student loan consolidation goal

The first thing to consider is why you want to refinance or consolidate your student loans. Matt Hylland, financial planner with Hylland Capital Management states, “Refinancing student loans can be beneficial in a number of ways, depending on your goals. Borrowers could refinance to lower their interest rate, pay off their loans sooner, or free up monthly cash flow.”

Knowing what it is you want to achieve by refinancing or consolidating student loans will also help you weigh the pros and cons effectively. Hylland continues “If refinancing enables you to pay off higher interest debt, or save more into retirement accounts, it may be beneficial in the long run.”

Is your goal a lower interest rate, a more manageable monthly payment, or freeing up cash for other purposes? Nail down the purpose and motivation for consolidating your student loans first. This will help guide the process. 

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Loss of federal student loan benefits

If you want to consolidate federal student loans, you’ll want to look at the Direct Consolidation Loan program first. This is the consolidation program offered by the federal government, and it will allow you to retain the benefits of your federal student loans, such as deferment, forbearance, Income Driven Repayment, Public Service Loan Forgiveness, etc.

When you consolidate through the federal program however, your new interest rate is a weighted interest rate determined by your existing student loans. This program may help streamline the repayment process, but you won’t see much of a change in your interest rate.

Private student loan consolidation, also known as refinancing, can offer highly competitive interest rates that may be much lower than what you are currently paying. However, if you refinance your federal loans with a private lender, you will lose the guaranteed benefits of the federal program.

According to Hylland, “There are many cases where it would be worth paying a higher interest rate on certain government backed loans compared to a lower interest rate with a private lender. Although interest rate is important, there is usually more to consider.”

If you’re confident in the stability of your income, private student loan consolidation may offer the savings and flexibility you’re looking as you plan for your financial future.  However, if you are consolidating because you’ve fallen on leaner times, the benefits of the Direct Consolidation Loan program may offer you more financial security.

Compare private student loan refinancing lenders

If you are consolidating your student loans via private student loan refinance (rolling federal, private or both types of student loans into one), you will want to compare lenders to find the best option to help you achieve your goal. Common items to evaluate include:

Available repayment terms
Fixed and variable APRs
Cosigner release
Benefits (some lenders offer short periods of deferment in cases of unemployment, APR discounts if you enroll in autopay, flexible terms, no origination fees, spouse loan consolidation, etc.) 

Schrant also points out the importance of your relationship with your lender. “…having a lender with great customer service is important. When talking to people dealing with student loan repayment, a complaint often heard is that the lender's customer service leaves a lot to be desired. Since this relationship could be long-term, be sure to have this be a consideration in the refinance plan.”

After you refinance or consolidate student loans

Once you’ve followed through with the decision to consolidate or refinance, make sure you keep your goals in mind.

“The danger in a refinance, oftentimes, is that the borrower feels like they have really accomplished something with the refinance. However, their balance sheet has not changed at all. The amount of their liabilities is still the same,” Schrant advises.

If your goal was to free up money on a monthly basis in order to pay off a high interest rate debt (such as a credit card) or save for retirement, make sure you follow through with that plan.

Keep in mind that whether you pursue federal consolidation or private consolidation via refi, there are no penalties for paying your loan off early. If you extended your repayment term to help get you through financially challenging times, and later find yourself earning more, paying your debt off early can save you hundreds, even thousands of dollars over the life of your loan. This can help you achieve other goals, such as buying a home, saving for retirement, or saving for your children’s education.

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