Do you feel like your swimming in your student loans? Maybe even trapped? Trust me, you are not alone. In 2016, Americans owed over $1.3 trillion in student loan debt (this is spread out among about 44 million borrowers). In fact, the graduating class of 2016 had an average of $37,172 in student loans before entering the workforce. With this amount of debt each borrower probably has multiple loans. Which brings us to the question at hand should I consolidate my student loans?
Over the past couple of years, I have been wondering this question because we have multiple student loans. Plus I have been receiving offers in the mail to lower our monthly student loan payments. So what is the benefit of consolidating?
PLEASE NOTE: That I am not a financial advisor this information is the info I found to answer this question for myself.
BENEFIT OF CONSOLIDATING STUDENT LOANS
If you’re juggling multiple student loans payments, you could benefit from consolidation because it can simplify your finances. Consolidation rolls all the student loans into one big loan. Meaning you will have one payment instead of multiple.
Now, this could sound very fantastic to you but there are other things you need to understand before deciding on this strategy.
WHAT TYPE OF LOANS DO YOU HAVE?
There are normally two types of loans: Federal and Private Student Loans. Let’s talk about each of these.
Federal Student Loans:
These loans are funded by the government. You do not start paying (repaying) on them until you graduate, change your enrollment status to less than half-time, or leave school. They now offer a fixed interest rate (a credit check is not required) and the interest you pay is usually tax-deductible. Federal loans offer many different repayments (Income Based) and hardship options (like deferment and forbearance).
Private Student Loans:
These loans are funded by a private lender such as a bank or credit union. You may be required to pay back your loan while you’re in school plus it might have a variable interest rate. You normally need a credit check when receiving the loan. Plus many of the perks you have with federal loans may not be included in private loans (interest not tax deductible, repayment, and forgiveness options).
So what type of loans do you have? Federal, private, or maybe both this will help you decide! Before jumping into the pros and cons there is one more thing I want to discuss because I think these two things get confessed.
CONSOLIDATE OR REFINANCE?
Consolidating or refinancing student loans does the same thing, it combines all your loans into one. But they are different in the way that they are combined.
When consolidating a federal student loan, the new loan has a fixed interest rate for the life of the loan. This interest rate is based on the weighted average interest rate for the “old” loans then rounded up to the nearest 1/8th of a percentage point.
Now for refinancing your student loans. You can refinance both your federal and private loans into one and this is done using a private lender. Do you remember those offers I was receiving in the mail? These are for refinancing your loans, like SoFi. When you refinance your loans, you have the ability to a different interest rate (depending on your credit score).
SIDE NOTE: If you have credit card debt you can take out a personal loan through SoFi and receive a lower interest rate to help you pay off that debt faster!
The biggest reason I was considering consolidation or refinancing our student loans, was to save us money. So would you save money?
WOULD YOU SAVE MONEY
After doing lots of research I have found that this answer depends on so many things. Plus what benefits you would lose if you switch a federal loan to a private. But here is want I found.
In consolidating a federal loan (through the government):
- Almost everywhere I read, consolidating federal loans will not save you money.
If consolidating/refinancing with a private provider:
- This depends on multiple things (current interest rate, credit history, and term of the loan) but yes it could save you money.
Because I am not a loan advisor please research for yourself, if consolidating or refinancing will save you money. Also, The Simple Dollar has a wonderful article called “Student Loan Consolidation Guide” that breaks down consolidating into more detail.
SHOULD I CONSOLIDATE MY STUDENT LOANS?
The biggest benefit to consolidating your student loans is to simplify your finances (have all your student loans in one loan). Consolidation or refinancing of student loans is a huge decision that you should not take lightly. Because once you do it there is NO going back. Please keep in mind that federal loans have many many benefits within the government and that if you refinance private loans you could save money.
Now if you’re wondering what I decided about our student loans, I decided not to consolidate or refinance. Why? Well, all of our loans are federal loans that we have been paying on for years. We are taking advantage of the perks within the federal loans. Plus if we consolidated, all the years we have been paying on would go away, making our loan forgiveness start back at 0. We do not plan on refinancing with a private lender right now because of the perks of our federal loans. (If we did have any private loan, I would probably refinance that loan).
Please remember to do your research before consolidating or refinancing a student loan because if you’re doing it to save money, you need to make sure it really will!