poker chips all in

Do I have to go “All In” on student loan refinancing?

Michael Lux Blog, Consolidation, Student Loans 2 Comments

Refinancing your student loans is a major financial commitment. One thing that people often don’t realize is that refinancing is not an all or nothing proposition.

Borrowers do not have to refinance all of their student loans together. Student loan refinance lenders will allow borrowers to choose the specific loans that they want included in the refinance.

In fact, only refinancing certain loans can often be very advantageous. The best way to illustrate this is a simple example:

Student Loan Refinance Example

Suppose you have three student loans. Each loan has a balance of $10,000. Loan A has an interest rate of 9%, Loan B has an interest rate of 7%, and Loan C has an interest rate of 3%.

After checking rates with a number of student loan refinance companies, you learn that the best interest rate you can get is 5%.

The Question: Should I Refinance Everything Together?

Many people make the mistake of thinking that combining all three loans is the best approach because you are still lowering your interest overall, so it is a smart move. Combining all three loans leaves the borrower with a $30,000 debt at 5%.

In reality, the smartest move would be to only consolidate the high interest loans and to leave the low interest loans alone. In our example, the borrower could have one $20,000 loan at 5% and one $10,000 loan at 3%. Doing this approach will help save a lot of interest over the years (the exact amount will vary depending upon how long it takes to pay off the loans).

A Note about Federal Loans

This is one area where federal loans work much different than private loans. If you combine your federal loans, it is done through the Department of Education. This process is called federal direct consolidation. Interest rates are not determined based upon what you qualify for, instead, it is just a weighted average of all of your loans. This calculation policy means that a reduction of interest rate is not an option through federal government consolidation.

Borrowers are able to refinance their federal loans with a private lender, but this comes with risks. Major risks include losing out on the chance of student loan forgiveness and income-driven repayment plans. Many choose just to refinance their private student loans. However, refinancing federal loans can also result in dramatic interest savings. As a result, borrowers need to carefully consider their options when it comes to refinancing federal student loans.

The Advantages of Refinancing All Student Loans Together

The clear motivation behind any student loan refinance is to get a lower interest rate. However, there are a couple other advantages that borrowers might also enjoy.

Having all of your student loans with a single lender is convenient. Even though we think this perk might be a little overrated, it does help prevent late payments or missed payments.

Borrowers who combine all of their student loans often are able to spread out the payments over a long period of time. This can mean more spending on interest over the life of the loan, but it reduces the monthly student loan bill. It also gives borrowers the opportunity to set money aside for other financial goals such as buying a house or saving for retirement.

Ultimately, borrowers have the choice of what loans they include in the refinance, the lender they select, and the repayment length they choose. All of these options can alter monthly payments and interest spending. The key for borrowers is to investigate the options available and to select the route that best fits their individual needs.

Notify of
Inline Feedbacks
View all comments

You can combine private and federal student loans with SoFi. I left my low interest undergrad student loan untouched. I consolidated federal and private law school loans. My private loan was in the high 8’s and variable. My federal loans were in the 6’s. My SoFi loan is in the low 5’s. I was also able to get rid of my cosignor. I will pay my loan off faster and save at least $17k over the life of my loan. I was very happy with the process. I’ve been using SoFi for at least 6 months now without issue.


I want to add that I know some people consider consolidating private with federal risky but in my situation, it isn’t. I’m 5 years into paying the 10 year federal loans. I’m married and with my husband’s income I do not think I would qualify for IBR. Also, SoFi has their own forbearance options in an emergency. I will not be working in the public sector so forgiveness in 10 years is not an option for me. There are also some protections with private loans. Federal loans get super priority where they can garnish social security checks and tax returns and you are barred from working in federal employment if you have federal loans in default. Private loans don’t have quite as broad collection ability. In many states, social security cannot be garnished by private companies.