should you refinance your student loans?

Student loans are back, for good. Interest accrual starts back up September 1st 2023 with payments resuming October 1st.

Interest rates are going up. Inflation is up.

The question remains: What the hell do you do with your student loans now?

If you’ve got a loan (or loans, plural) and you’re paying off debt, then this post is for you! We cover everything you need to know to navigate this transition with confidence, and create a plan to help you pay it all off ASAP – because that’s the goal, right?!

Here, you’ll discover the answer to questions like:

Should you refinance your student loans and reset the interest rate?
Should you consolidate your loans into one big kahuna?
What’s the difference between refinancing vs. consolidating your student loans?

And the most important: How do you know which one’s better FOR YOU?

Buckle up! Financial freedom is the finish line, and we’re here to help you race to the end!

👀 8min read

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Should I refinance or consolidate my student loans?

There’s one thing you gotta know before we even start on the paying off debt talk.

First, find out where you’re at numbers-wise.

This will help you decide if refinancing or consolidating your student loans is for you or not.

Ask yourself:

What is the total principal balance (full big balance) remaining on your loan(s)?
What are their interest rates?
What is your monthly must-pay number to pay it all off**?

**Note: This number might be different from what your banks/lenders are telling you! (see why below)

If you don’t want to do that math, open up a new tab and put these numbers into our money quiz. It’s free, takes about 3min, and it’ll tell you your monthly payment amount, plus how long it’ll take for you to become debt-free.

Here’s the quick calc, if you’re a do-it-yourself gal:

Total loan balance X annual interest rate = annual payment
Divide it by 12 (for 12 months in a year)
That = the bare minimum payment you need (to pay off the INTEREST alone!)

That “bare minimum” total is often the one banks/lenders share as your “minimum payment” – but you’re only covering interest at this point, NOT your actual loan. (<< READ THAT TWICE!!!)

The solution? Add justttt a bit to that “minimum” payment – that’s how you start to actually pay your “principal” (aka actual loan amount) and work towards paying off debt sooner!

Ok, time for the money piece:

Refinancing vs. Consolidation: Which is better?

Spoiler alert: it’ll depend on your numbers – and what type of loan you have.

What type of student loan do you have?

The 3 main buckets – or types of student loans – are:

Federal loans (AKA from the government),
Private loans (AKA from private companies), and
Refinanced loans (also from companies, but there’s a catch; see below)

FYI: Refinanced loans aren’t really available to you until AFTER you’ve graduated (there are some exceptions), and you already have either a Federal or a Private loan. (we’ll get more into this real soon)

Now, of course there are many subcategories to these. (cue in the eye roll)

Don’t worry. We’re not going to cover the nitty-gritty of each and turn this post into a snooze-fest. (crisis averted!) Fortunately, there’s no need to overwhelm your brain with this level of financial detail for us to talk about paying off debt quickly, or what to do with your student loan once the student loan pause is up.

What’s important is that you know which “bucket” your loan’s in, so you know what you’re eligible for.

Save that info. And keep reading. Soon, we’ll show you how to determine what’s the right move for you (and your wallet, specifically).

Refinancing vs Consolidating: the what and the why

These words are thrown around a lot in “loaning lingo” – but they are, in fact, 2 different things.

Student loan refinancing

Student loan refinancing can only be done through a private company, called a lender.

Refinancing is designed to help you combine ALL of your student loans (private and federal) into one single, more affordable loan by:

giving you a new (variable or fixed) interest rate based on your credit score, and
the option to choose a new loan term (aka, the time it takes to pay off your debt).

Why would you choose refinancing your loans?

A new interest rate could mean a lower interest rate, or moving from a “variable” (changeable) to a “fixed” (unchangeable) rate. This could save you thousandssss of dollars over the course of the loan term and/or decrease your monthly payments. Lower monthly payments = more cash in your pocket, which you can use for other expenses, or paying off debt faster!

For example, SoFi is a lender specializing in student loan refinancing; their fixed rates are between 3.49% - 7.99% – variable rates fall between 2.24% - 7.99%. If you have multiple loans, or your current interest rates are higher than 8%, refinancing sounds sexy AF.

The bugaboo?

If you refinance and lump your federal loans into this new private loan, you lose any and all benefits of having a federally-backed loan (like tax credits, income-driven repayment options, interest pauses like ones we’ve seen through covid and more).

Student loan consolidation

You can only “consolidate” your federal student loans.

Consolidation lumps all of your existing federal loans into a new, single federal loan with:

a new interest rate – always “fixed” (unchangeable), and
the option to choose a new loan term (the time it’ll take you to pay off debt).

And no, you cannot combine private loans into student loan consolidation.

Why would you choose consolidating your loans?

If you have many HIGH interest loans: this might help decrease them, and save you money in the long run.
If you have variable interest rates: moving to a fixed rate may give you some piece of mind, knowing that your monthly payments won’t change.
If you negotiate a new loan term: this could decrease your monthly payments.

And lastly:

If you’re reaping any of the benefits from having federally-backed loans, and/or you’re worried about losing these benefits, this method can protect your federal loans from that loss or risk.

The bugaboo?

Other than the fact you can’t combine your private loans into consolidating…

Your new interest rate is NOT determined by your credit score – and will not necessarily be lower. It’s determined by weighing the average interest rates of ALL your existing federal loans, rounded up to the nearest 1/8% – one-eighth-percentile. (enter eye roll x 1.8…)

So, which one is the right move for paying off debt faster?

Which one should YOU choose?

The short answer to whether you should refinance or consolidate your loans AT ALL is:

Do it ONLY if it will save you money! – otherwise, what’s the point?!!!

Remember, step #1 is to know your numbers.

Once you know:

how much you’re paying for each loan (principal, minimums, etc.);
details like your loan term & interest rate (variable vs. fixed); and
the type of student loan you have (federal vs. private, etc.)

Then, you can make an informed decision on whether refinancing or consolidating is the right move for you.

In general:

Refinancing = best option for simplifying and saving money (federal + private loans)

Consolidating = best option for simplifying and maintaining federal loan benefits

The federal government’s been lenient with loans in 2022 (a post-rona silver lining!) so if you’ve got federal loans, either consolidate or leave them be. If your loans are private, refinancing might be your best choice, since the current interest rates are quite competitive.

(Again: depends on your actual numbers! If you’re not saving $$ or sanity, don’t bother!)

Here’s a quick checklist to help you decide:

Are your interest rates high – at 7% or more?
Do you feel like you’re drowning with your current monthly payment(s)?
Is the length of time it’ll take for you to pay off debt feeling overwhelming?

If you said YES to any of the above, then go ahead with refinancing or consolidating your loans! Your future self will thank you. (Your current one probably will too?)

Also: If this is starting to feel like a lot, take a pause. Remember, one step at a time. Give your eyes a rest and listen to our founder, Crissi, break down how to get rid of these damn student loans on our IGTV.

How does this all work?

If you decide to refinance or consolidate…

First, you’ll need to apply and qualify.

There’s criteria for getting approved – like a good credit score and having enough income to make these payments.

But the application step doesn’t mean saying yes; rather, it’s an exploration of your options.

The good news:

You can always utilize a co-signer to get better options. This is someone who says, yes I’ll pay back this loan if this person can’t. Naturally, they must be in good financial health.

Zero or low fees. Amazing, right?! Unlike refinancing a mortgage, there typically aren’t any fees associated with refinancing student loans.

Lots of specialized lenders to choose from. There are many credit lenders that specialize in refinancing, making the process much easier. For example, SoFi allows you to check what your new rates might be – all online, in a few clicks, without impacting your credit score.

Things to keep in mind:

Applying to refinance or consolidate will temporarily affect your credit score. Checking rates is one thing. But when you apply, the lender performs a “hard credit check” to determine your creditworthiness (aka how “worthy” you are in terms of credit). It’s only temporary, but something to be mindful of, if you're trying to get approved for other loans – like a mortgage or a car.

Every lender has different rules. Every offer will vary. It’s up to you to know your numbers, read the fine print, compare your options, and only make the switch if it’ll save you money in the end.

Double-check your tax breaks. Especially important if you have FEDERAL loans! You might get a tax credit from your state – and, you might be eligible to deduct your student loan interest on your federal tax return. (up to a max of $2,500; more info here)

Like we said earlier, refinancing in 2022 may not be the best bet for those with federal loan(s) in the mix. Make sure you understand what federal benefits you might be losing and weigh your options.

However, at the end of the day, paying off debt is truly what matters – and if you feel that’s the right move for your wallet, then we’re here for it!

Remember: In finance, there’s never an “absolute” right or wrong choice. Only what’s right or wrong specifically for YOU.

And when it comes to paying off debt, Penny’s got your back with a FREE tool! Take our 3min money quiz to help you simplify the math and start taking real, tangible steps towards a debt-free future. We’ll have the champagne ready. ;)

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