The unintended consequences of private refinancing

There’s a pretty good chance that if you have student loans (and even if you don’t), you have received a flyer or some type of marketing piece describing how much interest you would save if you “refinanced” your student loans. There has been tremendous growth in the private student loan market and with that growth has come lots of marketing that has left recent grads confused and unsure about their debt. This post will discuss various aspects of refinancing your loans with a private lender and some of the potential negative consequences.

First thing’s first, what is refinancing and why do people do it?

Refinancing is basically borrowing money a second time to pay off old debt. It is usually done because the borrower can achieve better loan terms. In the case of a recently graduated dentist, that usually means a lower interest rate than what they currently have on their Grad Plus and Stafford loans. In the current economic environment, the private student loan market can offer lower interest rates. And that is why you get flyers saying things like “…our customers have saved an average of $22,359…” . Let’s use an example. Let’s say you have $450,000 in federal student loans and your average interest rate is 7%. Your payment would be $5,225 and you would be debt free in 10 years. You would have paid $177,000 in interest over that 10 year period. Now let’s say a certain private lender can refinance those loans at 5% (Which is not always the case). Your payment would be $4,773 and after 10 years you would also be debt free but you would have only paid $122,760 in interest- $54,000 less than if you had not refinanced. This is how refinancing works.

There are other terms to a loan besides interest rate that also change when you refinance. Most of the other changes caused by private refinancing are not favorable. So much so that I would hesitate to recommend someone refinance federal loans with a private lender unless conditions are perfect- even if it were possible to save money on interest. I will discuss those unfavorable terms in a separate post. For now, I want to make sure you understand two other terms.

Is consolidation the same as refinancing?

­­­­­Yes and No. Most of the private lenders use the terms consolidation and refinancing interchangeably. You can see this from the ads that pop up in a quick Google search. Technically, consolidation means: to make many things into one. And when you refinance, you are usually making a bunch of loans into one. So it’s somewhat similar.

However, “consolidation” and “direct consolidation” mean two very different things. In fact, so different that it annoys me that private banks use the term consolidation at all. It feels somewhat misleading. Direct consolidation refers to a process in which the borrower makes all their loans into one loan that is still originated by the federal government. A direct Consolidation loan takes all (with some exceptions) of your federal loans and makes them into one federal loan. This process causes certain types of federal loans to become eligible for repayment plans for which they would otherwise would be ineligible. You have one payment and the interest rate is pretty much the same.

If you were to consolidate your loans with a private lender thinking that you were doing a “direct consolidation loan,” it would cause you to lose all of your government benefits.

I can’t dive into all of the consequences of refinancing here, but more information can be found on my blog next week, I will go through the unfavorable consequences of refinancing student loans- namely the loss of income driven repayment options.

Let me know if you have any specific questions.

~Ryan Schulte, financial advisor

Ryan Schulte

Ryan Schulte is a CERTIFIED FINANCIAL PLANNER® that specializes in working with dentists. He is also the founder of, a student loan consultant group that works with dentists across the country to help them gain an understanding of their debt, their various repayment options and to create a plan for repayment. You can learn more at and contact Ryan at

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  1. neopho says:

    Thanks for talking about this very important issue. Looking forward to your upcoming posts!

  2. Very important issue discuss here.Thanks, I like this post.

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