Executive Summary

Refinancing debt to consolidate multiple loans into a single one is a standard of debt management. Sometimes it’s to get access to a more favorable interest rate. Sometimes it’s to reduce the monthly payment requirements by stretching them out of a longer repayment period. And in some cases, it’s just for the administrative ease and simplification of being able to make all the payments to one loan servicer.

When it comes to student loans, however, the refinancing picture is more complex. The reason is that today’s student loans are actually a combination of Federal and private loan programs, and to help alleviate explosive levels of student loan debt (the total of which now exceeds all outstanding revolving credit card debt in the U.S.!), Federal student loans are getting access to multiple forms of flexible repayment plans. Some of which even include terms that allow unrepaid student loans to be forgiven after 25, 20, or even 10 years in some circumstances.

But flexible Federal student loan repayment programs are only available to Federal student loans. In fact, old Federal student loans (under the prior Federal Family Education Loan [FFEL] program) can even be consolidated into new Federal loans eligible for (more) flexible repayment and potential forgiveness, under the Federal Direct Consolidation Loan program.

Unfortunately, though, students who refinance old (or new) Federal student loans into a private loan lose access to all of the flexible repayment and potential forgiveness programs. Which means when it comes to student loans, refinancing even if it’s for a lower interest rate or a smaller monthly payment can actually be far more damaging in the long run than keeping the original Federal loans, or simply consolidating (but not refinancing!) into the latest Federal programs!

Author: Michael Kitces

Michael Kitces is Head of Planning Strategy at Buckingham Wealth Partners, a turnkey wealth management services provider supporting thousands of independent financial advisors.

In addition, he is a co-founder of the XY Planning Network, AdvicePay, fpPathfinder, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website Kitces, dedicated to advancing knowledge in financial planning. In 2010, Michael was recognized with one of the FPA’s Heart of Financial Planning awards for his dedication and work in advancing the profession.

The Benefits Of Debt Refinancing And Consolidation

For those who need to borrow money from time to time, debts can accrue from a variety of sources. And ultimately, a large number of loans are at best unwieldy to oversee and manage with a variety of loan servicers to pay, with varying interest rates and loan terms and at worst can compound too rapidly and spiral out of control, leading to default and bankruptcy.

In this context, debt consolidation strategies have become increasingly popular in recent years as a means to manage multiple debts. Consolidating multiple loans into one can simplify payday loans SD the number of payments to make and manage, and may even save money in the long run by obtaining a lower overall interest rate (e.g., when consolidating from credit cards into a Peer-To-Peer loan for borrowers with good credit). Refinancing multiple loans into a single consolidated one can also be appealing if the new loan has a longer repayment period, which may significantly reduce minimum debt payment obligations and make it easier to avoid default (though obviously, making smaller payments will also lead to more cumulative loan interest being paid over time).