Many graduates are transitioning out of school into the workforce with a huge chunk of debt on their shoulders. Often times, interest rates make it feel like that the payments will never stop. Making a dent in the debt seems like a colossal struggle. However, depending on one’s financial situation, refinancing can be a great way to make serious headway on the debt. However, that doesn’t mean that there aren’t any risks in doing so.

What Consolidation Could Mean

Federal loans offer a security net for debtors. If they fall on hard times and struggle to make their current payments, there is more flexibility by keeping your federal loans. You can attempt to lower your monthly payment, and always have the options of deferment and forbearance available to you.

A typical situation where you might use the deferment option is if you are struggling to find work after graduating to help you pay your students loans. You can defer your loan payments rather than take a hit by getting behind. Moreover, depending on the type of loan, the federal government may even cover the interest while you are looking for work. Forbearance is similar to deferment save for the fact that the interest is not covered and will continue to accrue.

As mentioned before, you will also lose the ability to lower your monthly payment. By consolidating with a private lender, you lose the ability to go on an income-based repayment (IBR plan, a Pay As You Earn (PAYE) plan and a Revised Pay As You Earn (REPAYE). These plans are designed to help those who qualify make more manageable payments. Moreover, you may also be giving up any loan forgiveness programs you may be in with the government.

When Should You Consolidate?

According to the article “Refinancing student loans can give you breathing room. Here’s when it makes sense,” if you are planning on consolidating with a private lender, then you should have at least a 1-year emergency fund to cover all of your bills and your student loan payments.

Part of this process includes doing your own research. Before you just jump into bed with a lender, you should research their background. Look at any reviews from other people that have done business with them as well as if the lender has had any legal issues in the past. Any negative reviews or lawsuits are obviously key indicators that you should probably keep looking for the right lenders.

Take the Time to Consider if it’s Worth it

If you are in a fairly good financial position, and you are able to find a great lender to consolidate your loans, then losing the safety net that comes with federal loans may be worth it. Just make sure you do your own research, especially in regards to the different lenders you are looking at, and talk to a financial professional to make sure that it is a good idea for your own situation.