the question of private refinancing of federal loans

Should I Consolidate My Federal Loans Into A Private Loan?

Michael Lux Student Loan Blog, Student Loans 3 Comments

Federal interest rates suck.  Many federal borrowers are paying upwards of 8% on their student loans.  This number does not change as interest rates drop, nor does it change if you have a great income or credit score.  Because of these facts, private consolation of federal loans has serious appeal.  For some it could be worth hundreds of dollars in their pocket each month, and a savings of thousands of dollars in interest over the life of the loan.

However, consolidating federal loans into a private loan is a huge decision.  It is something that can’t be undone, and something you could live to regret if your circumstances change.  Today we will look at the factors that go into the decision, and the circumstances in which it works.

[Editor’s Note: Federal student loan consolidation is an entirely different process with different considerations.]

Why is this such a big deal?

Here at the Student Loan Sherpa, we often remind readers that there are real risks to the consolidation process.   The biggest risk comes from consolidating federal loans into a private loan.  Consolidating your federal loans into a private loan means that the federal loan perks are forever gone.  There is no way to “unconsolidate” and you cannot put the money back into a federal student loan.

What perks are lost?

Federal Student Loan Forgiveness – There are two main forgiveness programs.  The first is the public interest student loan forgiveness.  Under this program, if you make timely payments on an eligible plan for ten years, your student loans are forgiven.  Under the second forgiveness program, even if you aren’t employed by the government or a non-profit, making timely payments on an income based plan could result in your loans being forgiven after 20 or 25 years, depending upon your repayment plan.  This second form of forgiveness is normally called income-driven forgiveness.

If you think that either of these programs could realistically be a part of your future, consolidation of your federal loans into private loans is probably ill-advised.

Federal Income Based Repayment Plans – At present there are a handful of income-driven repayment plans.  Depending upon when you took out your first loan, your monthly payment could be either 10% or 15% of your monthly discretionary income.  If you are unemployed, that means your monthly payments could be $0 each month.  The best part about these repayment plans is that they are also eligible for forgiveness.  This means that if you have federal debt, you are protected in the event of an extended job loss.

Obviously nobody plans on losing their job, but if you have any concerns about your long-term employment outlook, having the federal protections in your back pocket is a good idea.

Who should consolidate?

If you read the previous section and thought those programs sound great, but unlikely to ever help you, private consolidation might be for you.  If you have no doubt that you will be paying off your student loans in full, and you just want to save some money along the way, you are ideally suited for private consolidation of your federal loans.  The borrowers who fall into the certain to pay off the debt in full category usually have pretty good jobs and credit scores, and the lenders compete to get their business.

From an employment perspective, you need to make an honest assessment of yourself.  If you lost your job tomorrow, how long would it take you to find another job?  Can you easily make the same money elsewhere?  Private consolidation shouldn’t really be considered unless you have little to no concern about your long-term employment outlook.

As we noted in our SoFi student loan review, with interest rates under 3%, these loans can offer a huge interest savings compared to federal student loans.  This is especially true for people who racked up a ton of high interest federal student loans in graduate school.

How do I make the decision?

If you have the credit score and income to consolidate, look at it as an insurance question.  The extra interest that you currently pay for your federal loans is like an unemployment insurance policy.  If the interest difference doesn’t amount to much, it is probably best to just keep the added protection.  However, if you are spending hundreds each month on an insurance policy you are confident you will never need, it might be time to make a change.

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This requires some planning! The perks can be substantial under specific circumstances. It is tough decision because the time frame ranges 10-20 years. I think you have to make your best decision based on your information now.

The Student Loan Sherpa
Reply to  krantcents

It is a huge financial decision. Many people were not thinking far enough into the future when they got their student loans, but the last thing you want to do is consolidate them without understanding the consequences.


Great advice as always. each case is different, of course.