Managing Student Debt: Refinance or Consolidation?

November 21, 2016  |  

Managing Student Debt: Refinance or Consolidation?

With millions of high school seniors polishing off their college applications right now, thoughts are consumed by grades, test scores, recommendations and deadlines. Will I get in? When will I find out? What’s my backup plan? Answers to those stressful questions will be resolved in the short months ahead. But “How will my family and I pay for it?” often takes a back seat to the thrill of an acceptance letter from a top choice school.

The average 2016 college grad will owe over $37,000 in student loan debt after he or she graduates – the highest amount ever recorded according to sources such as US News & World Report and the Institute for College Access & Success (TICAS). Sure starting salaries for new grads are finally starting to rise, but carrying that kind of debt at such a young age is a pretty big mortgage on your future. Further, it can significantly delay a young grad’s ability to own a home, get married, start a family, accumulate wealth and reach other milestones of traditional adulthood.

When you hear the word “refinancing” you often think mortgages. But with such a sharp increase in the amount of student debt, the “refi” conversation also needs to include student loans. Let’s look at a few key considerations when it comes to refinancing student debt:

1. Federal vs. Private Loans

Congress sets the interest rate for federal student loans.  It is important to remember that you can refinance a federal loan into a private loan (and you can also refinance private loans into a new private loan), however, you cannot refinance a private loan into a federal loan.

2. Consolidation vs. Refinancing

Many undergrads and graduate students are carrying multiple student loans simultaneously, paying different interest rates on each.  A popular tactic is to consolidate the various loans into a single larger loan.  While consolidating loans will create a single new loan with a seemingly better interest rate–you are actually paying the same amount. That’s because when you consolidate federal student loans, the government will take the weighted average of all the interest rates you are currently paying to calculate your new interest rate. Below is an example:

Loan A is a $10,000 loan at a fixed 4.5% interest rate.

Loan B is a $10,000 loan at a fixed 3.4% interest rate.

Loan C is a $5,000 loan at a 6.8% interest rate.

After consolidating the three loans above– you end up with a single new loan for $25,000 at an interest rate of 4.52%.  If you have multiple loans and are curious about consolidation, Direct Loan Consolidation Program calculator is a great tool to quickly find your new interest rate.

3. Refinancing with a lower interest rate – but new terms

Refinancing your student loan at a lower interest will save you money.  However, a lower rate isn’t necessarily better. Once you refinance your loan with a lower interest rate, you also have new loan terms. For instance, refinancing a federal loan to a private loan may save you money on interest. On the flip side, you may lose many of the protection benefits of the federal loan, such as modifying repayment plans, PAYE (Pay As You Earn) Repayment Programs, pausing payments and the possibility of obtaining loan forgiveness.


For many young adults, attending the right college or university can have a profound impact on their worldview, their career choices and the lifelong friends they make. Cost is only one of the many variables, but you don’t want chronic debt load to quash your dreams during your school years and for decades to come.



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About Patrick Melvin Jr.

Patrick D. Melvin Jr., is a Wealth Manager at Independence Advisors, LLC. Pat models client’s financial plans and works with the firm’s clients on financial planning areas such as retirement planning, investment planning and estate planning. CLICK HERE TO ASK PAT.

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