A financial planner explains whether you should consolidate your student loans

UC San Diego/Facebook

Certified financial planner Sophia Bera answers:

Should I consolidate my student loans?

The short answer: probably not.

The long answer:

Student loan debt is now a record 1.2 trillion. When students graduate, they often have 8-10 different federal loans with a variety of interest rates.

In order to streamline their payments down to one, many people are interested in consolidating, but there are some things to consider before you move forward.

When you consolidate a federal loan, your interests rates are averaged and rounded up by one-eighth of a percent, so it is actually more expensive to consolidate.

If you are interested in paying off your student loans rather quickly, I would discourage you from consolidating and instead pay off your loans one at a time starting with the highest interest rate first. This will save you the most money.

In addition, I've noticed is that it's more motivating for my clients to knock out a $5,000 student loan in a year than pay extra on a $40,000 student loan year after year.

Other reasons why I'm not a huge fan of consolidation include:

• You lose the six-month grace period before you have to pay back the loans after you finish your schooling.

• You lose the great loan forgiveness options that go away with consolidating Perkins loans.

• You only get one chance at consolidation, so if interest rates go down, you're stuck with the interest rate from the time you consolidated.

UC San Diego/FacebookI would only recommend consolidating if you are drowning in student loan debt and want to choose one of the income-driven programs (i.e. Pay As You Earn, Income Based Repayment) or an extended repayment option. If you're ready to move forward with consolidating your federal loans, check out this article by student loan expert Heather Jarvis.

So far we've been talking about consolidating federal loans. My thoughts on private loans are a little different. When you consolidate private loans, you are also refinancing them — your lender gives you a loan to pay off your existing ones, with a new interest rate based on factors such as your credit score (rather than on an average of your current loans' rates).

First of all, be very cautious about refinancing your federal loans into a private loan. You need to be aware of the benefits you're giving up when you do this, such as the possibility of forbearance or deferment.

However, if you have private student loans at a high interest rate, and your credit has improved since you took out the loans, then I highly recommend refinancing those loans. There are a few companies out there such as CommonBond and SoFi which can help you lower the interest rates on your loans. They have a variety of different repayment options available, but I tend to favor their fixed rate loan options.

My verdict: Don't consolidate federal loans. Refinance private loans if you can lower your interest rate.

This post is part of a continuing series that answers all of your questions related to personal finance. Have your own question? Email yourmoney[at]businessinsider[dot]com.

Sophia Bera, CFP® is the Founder of Gen Y Planning and has been quoted in The New York Times, Forbes, Business Insider, AOL, The Wall Street Journal, and Money Magazine. She tweets, travels, and loves helping millennials manage their money more effectively. Curious? Sign up for the free Gen Y Planning Newsletter.

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