Student Loans: Consolidating vs Refinancing - Part 1

Associates, welcome back. In this module we're going to talk about consolidating your student loans. And in the next module we're going to talk about refinancing your student loans and what the difference is and when you should consolidate versus when you should refinance your student loans. So on the subject of consolidation, consolidation is simply the combining of multiple federal education loans into a single direct loan. And what happens is each of your loans, most of you will have multiple tranches of loans that you took out with, with each year in school or semester. And you'll have a, you'll have a portfolio almost of loans. When you consolidate, you're bringing all of those into one single loan, or at least the ones you decide to consolidate, because it's not all or nothing. You can consolidate some and not consolidate others, and that's totally okay. But the ones that you do consolidate, the interest rate will be what's called a weighted average interest rate. And the weighted average interest rate isn't the average of all of the interest rates, it's the weighted average. So if you have a larger balance on a given loan, and that's at a higher rate, and then you have a smaller balance on a loan at a lower rate, the combined is going to be a rate closer to the higher rate because it's proportionate to or pro rata to the balance on the loan. And that's called your weighted average interest rate. The term on these loans is generally between 10, 30 years and you have some flexibility to choose the term on those loans. Remember that the 10 year is the standard repayment 10 year amount that's used to measure for your income driven repayment plans. Now when would you want to consolidate? Well, let me give you four reasons, and there may be more, but here's the four sort of big reasons I want to highlight is number one, if you have an indirect loan, which is a loan that was issued through a bank and guaranteed or backed by the federal government, these loans were issued before 2010. So many of you, especially if you're in dental school now, totally inapplicable. But if you had an indirect loan, and you want that loan to be eligible for the income driven repayment plan options, IBR pay and repay, then what you'll have to do is you'll have to go through this doorway known as consolidation to convert those loans to be eligible to be on an IDR plan. Because only direct loans, direct loans are eligible for IDR plans, indirect loans like a fell loan or a Perkins loan, FFEL loan, and a Perkins loan are not eligible. So that's one motivation to consolidate your student loans. A second one is that when you want to simply, well, simplify your overall context of your student loans and have one simple payment. So if you got 12 loans and you just want to have one simple loan, you can track that one balance, make one payment. That could be a good reason just to sort of clean things up, keep it simple. The third reason is that if you're not on a 10 year standard repayment plan and you want to be eligible, or you're on an IDR plan and you want to be eligible to qualify for pslf, this is a good option to consolidate. If you're on an extended plan beyond 10 years, or if you are in, in an indirect loan, as we mentioned, and you're trying to ultimately get to a PSLF qualifying loan. Remember under our PSLF program we said loans in order to qualify for forgiveness, you have to qualify, you have to have the right plan, which is a direct plan, and then you have to have the right type of payment program which is going to be either a 10 year standard repayment plan or an IDR. So sometimes you got to sort of cross this bridge into a consolidated direct loan in order to get pslf. Now if all of your loans pre consolidation are on a 10 year standard plan, or if you got pay and repay and ibr, if they're all on pay, those can still qualify for PSLF as well. But if it's not on a 10 year standard repayment plan or on pay repay or IBR, which are the main income driven repayment plans, then you may need to consolidate in order to move it to one of those and thereby be eligible for PSLF forgiveness. And the fourth reason is if you're in default and maybe you're six, seven, eight months behind and you want to get current on good footing, then what you can do is make three voluntary loan payments. You just need to make three. Then from there you can consolidate your loans. Of course, this is assuming you haven't already consolidated your loans. You make three voluntary payments, so you're current on all of your loans and then you consolidate and after consolidation you're starting at ground zero, it's all a reset and you're clean and you can go forward making your payments on time. Now there's a few other considerations I want you to think about when it comes to consolidating your your student loans. The first one is this. If you've already been paying on your student loans and you're two Three, four years into it and you're planning on or targeting PSLF forgiveness or you're targeting the 20 year forgiveness on pay repay or IBR loans after 2014 or the 25, I should say for the repay as you know from a prior module and you're counting those years, you're sort of counting the clock that you want those years to satisfy that timeline. Well, guess what, when you refinance, I'm sorry, when you consolidate your student loans, you are resetting that clock and now you've got another 10 years to go for PSLF or another 20 years to go for IBR and pay and another 25 years to go for repay. So what you may want to do is let's say some of these loans, you have had more years under them and you're trying to qualify those and you don't want to reset that clock, maybe don't consolidate those ones and you consolidate the rest. Always keeping in mind that if you're following the practice CFO Associates on Fire program and our advice, we want you to own this and we want you to be successful in your career financially and, and to not be trying to keep your income below a certain level just so that you can qualify for forgiveness which you're going to find out later on unless it's PSLF is taxable as well. So to me that's not a winner's plan, it's just not a winner's plan. Now you may just by nature of your career path where you always stay under that level or maybe you came out of school where your loans were so astronomically high that no matter how much you make, you're still staying, your 10% is still staying under your 10 year repayment plan then maybe. So I'm not saying that not every, that nobody that's trying to be a winner is going to get that. But I'm just saying a lot of people are trying to intentionally keep their income low in order to get that forgiveness. And that's what I'm saying isn't good financial decision making. Okay, with that said, so number one in this consideration is remember that you're resetting the clock whenever you the forgiveness clock whenever you consolidate your loans, which you can only do one time, which is the next consideration. You can only consolidate these loans one time. And typically, as you've heard me say before, the best time is probably when you're out of school, all your loans are done, you wrap them all up into a single consolidated loan. You'll want to look at the interest rate Changes of course, from what you currently have into the consolidated loan. Actually, no, come to think of it, remember I just said that the consolidated loan is, is the weighted average interest rate. So I don't even even. I mean the government sets these rates and it might go up, but it's going to take your interest rates on your existing loans pre consolidation and it's going to give you a weighted average interest rate regardless of what the going federal rate is on these student loans. So refinancing right out of school into a single loan, a pay or repay typically is going to be your best option. And, and watch our modules on those to see when one might be better for you over the other one. We go rule by rule on the differences between those, but that's typically the best time to pull that trigger. Use your one time option of consolidation and move into a single loan. Again, we're going to talk about refinancing which you could do later after consolidating. And that's very different. So stay tuned on that one. The third consideration is that you cannot consolidate a Parent plus loan. And many dentists, because of the size of the loans they need, are not able to get the full loans through the unsubsidized loans. And so they move to that extra layer, the Parent plus loan that cannot be consolidated. You're going to have to pay that off separately or eventually refinance that as we'll talk about later. And lastly, consolidating is free and it's easy to do on studentaid.gov there's one thing they got right, man, it's they made that an easy process. You can log in, you can see all of your loans, you can select the ones that you want to consolidate or consolidate all of them, and you do it. And it takes virtually no time at all. So if somebody comes to you and says, hey what, why don't you let me help you with your finances, I will help consolidate your loans. You pay me $2,000 and I'm going to simplify your student loan structure. Send them out the door because you can go on studentaid.gov and do that in no time flat. Now there may be consulting needs that you have around IDR or pay or repay. Should you shoot for forgiveness or should you not shoot for forgiveness? There's a lot of variables to consider there, quite a few actually. And that's one thing we'll do here at Practice CFO for our clients is we'll help them sort of decide how to move into or migrate through the student loan decision makings to ultimately be in the best setting and eventually pay pay it off. So it's free and easy to do online. Now we're going to talk about student loan refinancing in the next module.