Last year I shared a lot about my car loan debt and how I was paying it off.
Now that it’s out of the way and paid off, I’m definitely shifting my focus to attack my student loans this year. I put student loans on the back burner last year since my strategy to pay off my debt involves eliminating high interest debt first and working my way down to the lower interest debt in order to save money.
As a result, I put very little toward my student loans last year and interest ate up quite a bit of that money.
Below is a screen shot of my current student loan balances:
As you all know, I want to get rid of this debt ASAP so I’m trying to find the most efficient way to pay it off in the shortest amount of time. This is when I thought about consolidation and refinancing my loans.
Consolidation and refinancing are not one in the same, but they are very similar. Consolidation and refinancing are best if you have a large balance you need to tackle, or high interest rates on your loans that could be lower. For individuals who are lucky enough to have a small balance, you should know that you must have at least $7,500 to meet the eligibility requirements of most companies. The $18,000 I still have in debt is a lot of money to me.
RELATED: Is It Worth It To Refinance Your Student Loans?
What Consolidation Entails
Consolidation involves combining multiple student loans into just one loan. By rolling all your loans into one amount, consolidation will simplify the debt by allowing fewer bills and payments to keep track of each month.
In addition, consolidation allows borrowers to switch out older, variable rate loans with just one interest rate while possibly lowering your monthly payment as well. Consolidation can be done with a federal or private lender.
How Refinancing is Different
Refinancing is similar to consolidation in that it allows you to combine multiple loans into one amount and lower your interest rate. When you use a refinance student loans program, you take out a separate loan with new terms through a new private lender to pay off your loan balance, then you pay back the private lender at a lower interest rate.
Which Option is Best for Me?
I’ve been thinking a lot about refinancing my loans lately. The conversation has also come up during a recent recording of my new podcast Financial Conversation (that has yet to air), where the ladies and I discuss our take on student loan debt.
The benefits of both consolidation and refinancing sound nice, but there are a few disadvantages. If I chose to refinance my federal loans, I would give up any opportunity to receive federal loan relief options like deferment, forgiveness, income-driven plan and more should I ever need them.
I haven’t really even taken advantage of any of these options and as of now I don’t plan to in the future. If anything ever happened to me where I couldn’t earn an income or make ends meet, it is nice to have those options, but I would also enjoy a lower interest rate and the ability to pay my loans off quicker.
I don’t want to drag the repayment process along and I’m hoping to be student loan debt free in two years at the latest.
On the flip side, my interest rates are not that high even though they could be lower. Right now I pay one monthly payment for my student loans but the amount is split among the five loans I have and I have no control over which loan I want the payment to go toward unless I pay extra each month. I can’t stand that.
With one payment and one lower interest rate, I feel like I can make more progress instead of having one payment being split five different ways.
Consolidation and refinancing are best if you have a large balance you need to tackle, or high interest rates on your loans that could be lower. The $19,000 I still have in debt is a lot of money to me.
After weighing these pros and cons, I feel like refinancing my loans can definitely help me crush my student loan debt, if I’m willing to take the small risk of opting out of Federal student loan relief options. I really wish I would have refinanced my car loan last year, but I ended up paying it off so fast. I’m definitely all about paying less on debt and minimizing the amount of money that gets wasted on interest.
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Jessica says
You ask a good question. Based on your situation, I don’t think it would be too much of a risk to refinance and lose the federal benefits. On the other hand, your student loan interest is really low and at the rate you’ve been going you’ll probably be able to wipe out the higher rate loans pretty quickly. I’m sure whatever option you decide to go with will work out well for you.
Personally, I started out with about $82k in debt with interest varying from 6.8%-7.9%. I wish I would have refinanced because the interest rates are ridiculous! Instead, I just started to focus one the highest rates and balances and pay the minimum on the others. At this point, I’m just going to stick with that approach.
Choncé says
I definitely think refinancing is worth a shot it your interest rate is variable. My rates are not that bad, but I’m just wondering if they can potentially be lower. Decisions decisions…
lovetteorleavette says
I usually make decisions based of long term, if that helps. What is the best option for me now versus what is the best option for me five years from now, and then weigh the benefits of both. Both options were available to me along with the loan forgiveness so I may not be the best person to offer particular advice.
Choncé says
That sounds like a great strategy. Forgiveness is not an option for me, so I’m more willing to lose and other govt. benefits and refinance.
Liz says
Honestly, in this situation, since you have so many smaller loans, I would choose to stick with what you have and do the debt snowball or avalanche method. Not only is it going to feel good watching those loans fall off bit by bit, but I don’t think refinancing is going to save you that much. You have one teeny tiny loan with a higher interest rate, and you’ll have that paid off next month (I assume). I wouldn’t consolidate. However, the choice is totally up to you. Usually, people refinance or consolidate because they can’t make their payments, which doesn’t seem to be your problem.
Choncé says
I love the avalanche method.And yes, you’re right. I knocked that smaller loan out this week.
Melisa Boutin says
I definitely agree with Liz.
DC @ Young Adult Money says
Not that my opinion matters because it sounds like you’ve already made up your mind, but with such low interest rates I would pay those loans off as slow as possible (except for the 6% one). Instead I’d throw any extra money into investments because your gains are likely to be more than 3 or 4%. But again, some just want to get rid of debt as quickly as possible which I can’t say is a bad idea!
Choncé says
I totally get what you’re saying and it’s sucks that I’m not investing as much as a could be. My hope is that losing a year or two doesn’t make a huge difference since I’m still pretty young. It just feels like debt is such a liability though. If anything ever happens to you or if you are unable to pay, your student loans still won’t go away but you can survive a few months without investing.
Melisa Boutin says
Great point Chonce. I try to do both by investing in retirement plans at work and my own Roth IRA and still apply extra payments to my student loans. I had a private loan at 9% interest rate and prioritized that debt because of the 9% return I would get with every extra payment. Thankfully, I finished paying that student loan this past December.
Choncé says
That’s great that you got that loan paid off ASAP! You probably saved a ton of money in interest.
Cat@BudgetBlonde says
You need to put extra toward that little balance with the highest interest rate. You can kill that one off quickly and then the rest won’t be so bad. Awesome job!
Choncé says
Thanks Cat. Just paid that baby loan off this week! On to the next 🙂
Jenni@DitchingOurDebt says
You may find this weird, but I am jealous of your interest rates! We have $68,000 in federal loans right now (law school – sigh) and the lowest rate we have is 5.4%. We’re about to knock out our first loan which was at 7.9%. I think it really depends on your situation – if it were me, I would stick with the Federal loans for the flexibility they provide. We have 4 kids and another on the way, and while we hope to make significant progress on our loans in the next few years, we still like to know that if we need to, we can pay $0 in any given month. I like to call it “peace of mind” insurance. But if you have a good income and are pretty confident you can handle the payments, you could re-finance. Have you ever thought of putting part of them on a 12 month 0% introductory interest credit card? I know that Stephanie at Six Figures Under did that.
Choncé says
That’s a very valid point. My interest rates are certainly not the highest and it does give me some peace of mind to know that I can rely on federal student loan relief programs if I ever needed to.