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Consolidate Student Loans vs. Debt Restructuring: Which Is Best?

When you’re a senior in college, probably one of the last things on your mind is student loans. We can still hear ourselves saying, “It’s all good. Future-me will deal with it.”

But life can hit you pretty fast.

Whether you got your dream job after graduation or you’re making ends meet until you figure out your next move, student loan payments can feel like an obstacle.

If you feel like you’re drowning in student loan debt, let us throw you a life jacket in the form of two potential solutions: student loan consolidation and debt restructuring.

Understanding Student Loan Consolidation

If you have multiple federal student loans, you can consolidate those loans and get one simple monthly payment.

Confused about consolidation? Here’s a nice metaphor:

You’re at a restaurant celebrating a birthday with friends, and one friend offers to put the entire check on their card. This awesome friend combined the table’s debt into a single payment, saving the waitstaff the headache of running multiple cards – and saving you from math.

That’s a form of consolidation.

Consolidating your federal student loans is no different.

Instead of a generous and considerate friend, the U.S. Department of Education handles your consolidation. And it’s free — yes, free! So beware of companies advertising federal student loan consolidation for a price.

And there’s more…

Reasons why consolidating could make sense for you

Okay, so now that you know what consolidation is, let’s look at what it could allow you to do:

  • Make just one monthly payment — consolidation combines multiple federal loans to give you one payment instead of several
  • Switch to an extended repayment plan — extending can give you a lower monthly payment, but you will pay more over the life of the loan in interest since your repayment term is longer
  • Qualify for an income-driven repayment — this is based on your income and family size and aims to reduce monthly payments to affordable levels
  • Get out of default — if your loans have defaulted for failure to pay, consolidating can pull you out and get you back in good standing

Nobody’s keeping (credit) score

Another perk of consolidating federal student loans is that your credit score plays no factor. Your credit score won’t affect your ability to consolidate. And it won’t be negatively affected by your choice to consolidate.

The interest rate you pay after consolidation is based on an average of the rates you were paying on your loans (rounded up to the nearest one-eighth of a percent). Again, your credit score plays no factor.

Now, although your credit score won’t affect your rates or ability to consolidate, paying back your loans does impact your score.

Missing just one payment can have negative effects, so set a reminder on your phone or turn on auto-pay. Make sure you keep that score as high as possible.

Debt Restructuring Explained

If your monthly student loan payments are keeping you up at night, debt restructuring could be your ZzzQuil.

Debt restructuring is a pretty broad term that includes many forms of debt management. The goal of each option is to help you avoid defaulting by lowering your monthly payments. This can be done by lowering interest rates or extending the payback period.

When it comes to restructuring student loans, there are a few things you can do to find some relief.

If you go through the U.S. Department of Education, you’re only allowed to consolidate federal student loans.

On the other hand, if you restructure through a private lender, they’ll allow you to combine federal and private loans to get the best rates or lowest monthly payment possible.

Whether your monthly payment is too high or you’re worried about free falling into default, student loan restructuring through a private lender can offer a flexible way to consolidate or refinance.

Sounds awesome, right? Well, before you race to Google and start looking up lenders, there’s a catch we need to mention.

Consolidation… but, like, different

Do you have multiple loans? Some federal loans and some private student loans?

To consolidate multiple student loans into one loan, a lender will buy you out of your current student loans, paying off all your debt.

Don’t start celebrating just yet. You still have to pay it back! The difference is that instead of paying multiple loans, you’ll have a single monthly payment that goes straight to your new lender.

After consolidating your loans comes the fun part: saving money.

Pop, lock and drop those interest rates

Refinancing your student loans is a great option to save you money. It typically goes hand in hand with consolidation through a private lender. Refinancing allows you to negotiate a new interest rate on your loans and potentially choose from a fixed or variable interest rate.

We hate to generalize, but let’s be honest — everyone loves saving money!

Keep in mind that dealing with a private lender means your credit score will affect the interest rate you receive. While a higher credit score will lead to lower interest rates, a lower score may give you less competitive rates. Stay in the know and learn more about your credit score and how to check it.

Don’t throw away federal loan perks if you don’t have to

Student loan restructuring through a private lender can be a great money-saving option, but it does come with a price.

Federal loans come with perks, such as income-driven repayment plans, extended repayment and Public Service Loan Forgiveness (PSLF). Working with a private lender to consolidate and/or refinance will convert your federal loans into private loans – causing you to lose out on government-sponsored benefits.

If you’re currently making use of a benefit or hoping to qualify for one, you should strongly weigh that potential loss against working with a private lender.

Comparing Federal and Private Student Loans

Okay, so by now you’ve probably heard us mention two types of student loans: federal and private.

If you’re not sure about the types of loans you have or you’re unsure about the differences between the two — don’t worry, we got you.

The feds

The main benefits of federal student loans are that they require no credit check to consolidate through the U.S. Department of Education. And they allow you to qualify for features like income-based repayment.

Federal student loans are issued through the government but managed by an approved loan servicer. They come in three different forms:

  • Direct subsidized loans
  • Direct unsubsidized loans
  • Direct PLUS loans (Grad or Parent)

Take it to the bank with private student loans

Private student loans are typically issued through a bank or credit union.

Going through a private lender allows you to choose between fixed and variable interest rates, and they offer choices on your period of repayment.

You can secure private student loans even if you have spotty credit. But keep in mind that the interest rates you get do depend on your credit score.

Should I Consolidate My Student Loans or Restructure Them?

Now that you know the differences between types of loans and the different features associated with student loan consolidation and debt restructuring, let’s compare the two side by side:

You want to…Student Loan ConsolidationDebt Restructuring
Lower your monthly payments
Lower your interest rates
Extend repayment period
Have one monthly payment
Still qualify for federal student loan programs
Consolidate your loans for free
Consolidate private loans
Get out of federal loan default

We’re gonna be like Switzerland and remain neutral. There isn’t a true “best” option between student loan consolidation and debt restructuring, but there is a “best” option for you.

Nice, right?

It comes down to your financial situation and the goals you have for your student debt. Think about it: Do you care more about lower monthly payments or lower interest rates?

Your Debt, Your Choice

When it comes to relieving financial stress, you are now at boss level. You know how to consolidate student loans and you know what other options are out there.

Let us be the first to congratulate you! You are ready to take on the next steps.

Look at your current financial situation, and the total amount of student debt you have left to pay back, then confidently choose the best option for you.

P.S. Don’t forget to check your credit score!

The Short Version

  • Consolidating your student loans will give you one monthly payment
  • Debt restructuring can be done in many ways and will typically help reduce your monthly payment
  • Which option you choose will depend on your financial circumstances (do you want to simplify repayment, or do you need a little breathing room?)
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