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Most college graduates accumulate some amount of student loan debt throughout their time in school. While many lenders provide a grace period after graduation, it’s vital to start strategizing the best way to tackle this debt before your first payment is due. One popular method to manage student loan debt is to consolidate or refinance your student loans. Learn how to consolidate student loans and if the consolidation process is your best option for repayment.

Get organized

The very first step should be to make a list detailing all of your student loan debt. This list should include:

• Loan amounts
• Interest rates
• Repayment periods
• Monthly payments
• Lender information

You’ll need all of this information to calculate how many payments you’ll be making on a monthly basis, the amount of those payments, and how that default payment plan fits into your current budget.

Federal vs. private loans

On your list, you should see what loans were from the federal government and if you have any student loans from a private lender. Our recommended approach differs depending on whether the loan is from a federal or private source.

Federal

Only federal loans can be consolidated through the government’s consolidation program, called a Direct Consolidation Loan. This loan allows you to combine all of your federal education loans into one payment. While the interest rate will remain fixed, you can extend the repayment time up to 30 years to reduce the monthly payment. However, extending the repayment period may reduce your monthly payment but will increase the total amount you spend in interest.

If you are struggling to keep track of making on-time payments for all of your federal loans, it may be a good choice to consolidate all of these under one payment through the Direct Consolidation Loan. If you don’t have many federal loans, or you’re able to easily keep track of multiple payments, we recommend sticking with your original loan terms. These loans often come with borrower benefits like interest rate discounts, rebates, or cancellation options. Once consolidated, you lose access to these benefits.

If you’re struggling with budgeting for these monthly payments, first look into the many repayment options federal loans provide or apply for deferment or forbearance if you need a short-term solution.

Private

You cannot consolidate a private loan through the government’s Direct Consolidation Loan. You can, however, refinance the loan through any private lender, like a bank or credit union. The lender who takes on the refinance will pay off your previous student loan and provide you with a new loan through them, often with better rates and terms. You also have the option to combine some or all of your private student loans into one loan through this refinance process.

Since private financial institutions don’t have fixed rates on student loans, there could be a chance that interest rates have decreased since you originally took out a private loan. If this is the case, then refinancing could save you hundreds if not thousands of dollars in interest over the repayment period of the loan.

Example:

If you currently have $25,000 in student loan debt from a private financial institution on a 10 year repayment plan at 8.5% interest, your monthly payment would be $309.96. The total interest you would pay over the life of the loan would be $12,196. If you refinanced at an interest rate of 6%, your monthly payments would drop to $277.55 and you would save almost $4,000 in interest over the life of the loan.

Tips for success

• Only consolidate federal loans through the Direct Consolidation Loan
• If your reason for consolidating federal loans is that you’re having trouble with the monthly payments, look to their different repayment plans, deferment, or forbearance options first before consolidating and extending the repayment period of the loan.
• For private loans, research to see what current interest rates are at. If they are significantly lower than your current rate, you can save money by refinancing.
• Your goal should be to reduce your monthly payments by lowering the interest rate, not extending the repayment period of the loan.
• Regardless of what path you choose, focus on making consistent, on-time payments to improve your credit score and avoid any penalties or fees.

Next Steps

If you feel that consolidating or refinancing your student loans may be the best option for you, the next step you should take is to talk to an expert. Talking to a student loan expert is free, they can help you decide if you could save money by consolidating, and they can guide you through how to consolidate student loans.

If you’re looking to consolidate federal loans, call their Loan Consolidation Information Center at 1-800-557-7392.

If you’re looking for private refinance options, you can contact our experts here.

Paying for college and figuring out how to manage student loan debt can be stressful, but as long as you do your research, you’ll find the best solution for your situation. You can read more about the in and outs of paying for college in our comprehensive guide. Read it today!