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Refinancing or consolidating your student loans can save you a lot of money, but only if you do it at the right time, for the right terms.

When (and How) to Try Refinancing or Consolidating Student Loans

Friends, does this sound familiar?: You’re describing the crushing emotional and financial burden of student loan debt, and the grown-up you’re speaking to says something like, “Wow, that sounds really rough, have you thought about *refinancing* and also ma’am this is a Wendy’s??”

And having no idea what the fuck that actually meant, you drove forward to the next window, dabbing at your eyes with the crumpled receipt for your vanilla Frosty, weeping in confusion and sadness and brain freeze?

I knew it. I KNEW it wasn’t just me!

Yes that’s right, my lambs: we’re talking about student loans again. This time we’re discussing your options for refinancing or consolidating student loans.

What the fuck do these mysterious terms even mean? What’s the difference between the two? How do you know if one is right for you—and if it is, how do you actually do it? Be amazed as we reveal the secrets!

Refinancing vs. consolidating: Dafuq’s the difference?

On average, people with student loans carry about $29,000 in debt. Coincidentally, that’s about what I graduated with, and you all know my super-speedy, super-exhausting student loan debt pay-off story.

The Basic Bitch advice for destroying your student loans goes like this:

  • Prioritize debt repayment over nonessential purchases.
  • Be frugal and minimize your expenses as much as you can.
  • Work hard to make extra payments toward the principal.
  • Take another job to make money on the side if you have to.
  • Follow a strategic approach to pay off your worst loans first.

But depending on your situation, you might be working your ass off doing all that and more, and barely keep up with the interest charges.

So… what do?

A more advanced option is to try to change the terms of the loan.

A lower interest rate or a different pay-off schedule could make all the difference in the world, and avert a full Little Match Girl situation. And there are basically two ways to do that: refinancing and consolidating.

How student loan refinancing works

If getting a loan in the first place is financing a purchase (the purchase being an expensive-ass college education), then refinancing is doing it again… but better!

Let’s say your original lender loaned you $100 at a 10% interest rate. That means they’ll lend you $100, and slowly get it all back, plus an extra $10 for their trouble. You get the money you need, and the lender makes their bread: win-win!

But maybe a new lender comes along and says “Hey buddy, I’m willing to lend you the same amount, but I’ll do it at an 8% interest rate!” New Lender offers to transfer the loan, repay Original Lender the $100 you owe directly. All you have to do is keep making your usual payments, but now they’re smaller, and addressed to him instead.

Which sounds kinda shady, now that I’ve written it out…

Ya wanna buy a sundial?

But when you think about it, it makes sense, as it’s a pretty good deal for everyone. It saves you $2, which is good for you. It’s good for New Lender, because they were able to undersell their competitors and capture the (slightly smaller) profits for themselves. For Original Lender, it’s not really good or bad—they don’t make the profits they hoped to, but they get their money back, so they’re free to go out and reinvest it in the next rube tied to the wheel of our hopelessly broken, deliberately classist education system a new valued customer!

Ah. Lenders competing with other lenders in an open marketplace, keeping profits lean and prices affordable for all: the dream of economic liberalism! King Louis XV of France would be so proud! I’m sure his heirs lived long, peaceful lives in thankful contentment of his keen economic insights…

How student loan consolidation works

Most students end up with more than one loan. Remember our recent case study on the teacher with $45,000 in student loan debts? That debt wasn’t one $45,000 loan, but three loans, each with a different interest rate, amount owed, and pay-off schedule. That’s pretty common—and this is where consolidation can help.

Consolidating student loans is a little like refinancing in that it replaces your original loan. When you consolidate a loan, it means you take several loans and combine them into a single loan with one interest rate, one minimum monthly payment, and one pay-off schedule.

There are caveats. For one, you can only consolidate federal student loans. (I mean, you can consolidate private loans as well—but it’s technically just considered refinancing. And it’s a terrible idea. Don’t worry, we’ll get to that.)

Also, you also can’t consolidate private loans under federal loans. Federal loans are like Hank and Dean Venture: forged from the same flesh, governed by the same deadbeat dad, they merge together easily to become Mecha-Shiva. Mixing-and-matching your private and federal student loans together would be like trying to combine Hank, Dean, Ultra Magnus, and XXXG-01D Gundam Deathscythe into some kind of Ultra!Neo!Mecha-Shiva. Sounds great on paper, but they just don’t go together! One has metric size bolts, and the other has imperial—c’est impossible.

When is refinancing or consolidating student loans a good idea? And when is it a bad idea?

The potential upsides

There’s really only one reason for refinancing or consolidating student loans: to save you money. And refinancing or consolidating can do that, but only if you do it at the right time, for the right terms.

When I think of borrowers who might benefit from refinancing or consolidation, I tend to think of people who know they have a pretty awful student loan now, and have good reason to think they can now do better. Circumstances like…

  • You didn’t make the wisest choice of lenders for your initial loan, and realize now that you agreed to really bad terms (like a high interest variable rate loan, oi).
  • You took out loans during a booming economy, only to graduate into an awful recession, as Kitty and I both did. Welcome to da clerb, it sucks here and we hate it!
  • When you first took out your loans, your credit score was bad enough to scare off all but the baddest, meanest lenders. But now you’ve worked hard to stabilize your situation and your credit has vastly improved.
  • Another lender offers you generous terms and you really like the side benefits they offer like better customer service or gentler penalties.

If you’re in one of these situations, refinancing could be exactly the Mercy you need, swooping down from heaven to save your dumb ass.

And blessings upon this reminder that credit scores are confusing, arbitrary, sexist, and racist but they still matter. So do your best to keep ‘em up, babies!

More on how to work that credit score:

The potential downsides

Listen up: refinancing or consolidating is not always the best decision for paying off your student loans.

In fact, it could end up being disastrous. Here’s why.

You may end up paying more over the lifetime of the loan. A refinanced loan may offer better interest rates with lower monthly payments. But the lender often achieves this by extending the loan into a longer repayment period.

Plus the clock can sometimes be reset on the loan! If you were three years into a ten year loan before, congratulations! You’re back in year zero if you don’t negotiate for a new pay-off schedule.

Refinancing lowers your credit score. Applications for new loans make up 10% of your total score, and the effects linger for about a year. Multiple “hard pulls” make you seem desperate and untrustworthy (true advice in sex and finance). So you should be careful about doing it if you’ve got other big purchases planned soon, like a car or a house, or anything else for which you might need to have a nice, high credit score.

It’s almost always a bad idea to refinance federal loans as private loans. There is almost no chance the terms, benefits, and protections will be as good as they are with federal loans.

  • Federal interest rates are almost always better than private loan rates.
  • Private loans rarely have income-based repayment tiers or robust flexible repayment options.
  • You’d lose the ability to apply for Public Service Loan Forgiveness. (Not that Betsy Devos is making it easy for you anyway…)
  • You’d miss out on emergency measures like the automatic forbearance offered by the CARES Act we discussed recently.
  • If our evil, communist blood rituals take effect and we finally get a president committed to wiping out student loan debt, you’re shit outta luck.

So how do I actually *do* it?

How to refinance private student loans

Most loans are eligible for refinancing, including student loans. If you’ve decided it’s right for you, here’s how it works:

  1. Contact a lender. More about how you choose a lender below!
  2. Ask the lender for a quote. They’ll need some information like your credit report, your personally identifying information, and the terms of your current loan.
  3. Evaluate the quote. If you’re offered a fixed interest rate that’s lower than your current net interest rate, and you’re not signing up for a markedly longer repayment schedule, take the deal! If not, walk away and try other lenders.
  4. Sail off into the gd sunset with a dog by your side. This step requires no additional details or explanations.

How to consolidate your federal student loans

Oh man, consolidating federal loans is easy!

Just go to the Department of Education’s website. Apply for a “Direct Consolidated Loan.” It costs no money, doesn’t hurt your credit score, and takes about twenty minutes. AKA my three most important criteria for determining if I enjoy any activity!

On that note, here’s more on mastering your student loans:

Who dafuq should I choose as my lender?

Well, you want a lender who’s going to offer you the best deal. WOW, what a deep and original insight! I’m sure our TED Talk invitation got lost in the mail…

Usually the best deal = the lowest net interest rate. But I would also say it’s not the only factor! You may want to consider their other benefits, such as flexible repayment options, or good customer service.

I also would weigh the lender’s investments through the lens of my own ethics. I acknowledge that not everyone has the luxury of being able to afford to pay slightly more for the services of a more ethical lender. But carbon neutrality is pretty cool, eh?

The most important thing you can do is shop around. Get a quote from everyone who will give you one. Loan applications have a 14 day “rate shopping” window where all inquiries count as just one. Meaning you don’t have to hold back on how many quotes you request. So long as you do them in one two-week span, one inquiry dings your score as much as a dozen. So bitch better not come home with less than six!

Think of it this way: Uniqlo, American Eagle, Rag & Bone, Everlane, and Primark all sell jeans—but you know those jeans are far from identical. They’re all sourced, designed, constructed, colored, fit, and priced very differently. If you stroll into a random store and pick up the first pair you see, there’s a high likelihood they won’t be right for you.

Financial services work exactly the same way! If you don’t do your research, you could end up with the financial equivalent of an expensive pair of jeans that makes your ass look flat and stains all your towels blue. Oh, the humanity…

Lastly, we want to thank Kelly Lannan, VP of Young Investors at Fidelity Investments, for generously contributing her institutional know-how to this article. Most of the information above came from an interview I did with Kelly on student loans and smart pay-off options. Fidelity has a student loan debt tool AND they’re currently giving away three prizes of $30,000 to help you pay off your student loans. Check it out!

5 thoughts to “When (and How) to Try Refinancing or Consolidating Student Loans”

  1. Just note that consolidating federal loans restarts the clock on PSLF payments. So if you’re 4 years into PSLF or etc, consolidation is likely a bad idea.

  2. I have 14 months to go for freedom. I refinanced my Parent Plus loan from Evil Navient to my federal credit union. It went from 5.5% to 8.3%, but I do not have to deal with Navient applying my extra principal payments to interest that has not even accrued yet, or not being able to find my account (only been paying on it for about 15 years). I can now make extra or double payments to be applied to principal whenever I want. Expect it to be paid off when I am age 66 instead of age 73.

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