There’s a pretty good chance that if you have student loans (and even if you don’t), you’ve received a flyer or some kind of marketing piece claiming how much interest you could save by “refinancing” your loans. The private student loan market has seen tremendous growth in recent years, and with it has come a flood of marketing that often leaves recent grads confused and uncertain about their debt.

This multi-part series will explore various aspects of refinancing your loans with a private lender—and some of the potential negative consequences that come with it.

First things first: What is refinancing, and why do people do it?

Refinancing essentially means borrowing money a second time to pay off old debt, usually to get better loan terms. For recently graduated dentists, that typically means locking in a lower interest rate than what they’re currently paying on Grad PLUS and Stafford loans. In today’s environment, private lenders can sometimes offer lower rates—and that’s why you get flyers that say things like, “Our customers have saved an average of $22,359…”

Let’s look at an example.

Suppose you have $450,000 in federal student loans at an average interest rate of 7%. Your payment would be approximately $5,225 per month, and you'd be debt-free in 10 years. Over that period, you’d pay about $177,000 in interest.

Now suppose a private lender offers to refinance those loans at 5% (which is not always the case). Your payment would drop to $4,773, and you’d still be debt-free in 10 years—but you’d only pay $122,760 in interest, a savings of more than $54,000.

This is the basic idea behind refinancing.

However, interest rate isn’t the only term that changes when you refinance—and most of the other changes are not in your favor. In fact, I hesitate to recommend refinancing federal loans with a private lender unless the conditions are nearly perfect—even if you stand to save money on interest.

I’ll cover those less favorable terms in more detail in the next part of this series. For now, let’s make sure you understand two related terms:

Is consolidation the same as refinancing?

Yes and no.

Many private lenders use the terms consolidation and refinancing interchangeably. You’ve probably seen this in the ads that pop up in your search results. Technically, consolidation means combining multiple items into one. And when you refinance, you're usually rolling multiple loans into a single loan—so it’s somewhat similar.

However, consolidation and Direct Consolidation are two very different things. So different, in fact, that I find it frustrating that private banks use the term consolidation at all. It feels misleading.

Direct Consolidation refers to a federal process in which the borrower combines multiple federal loans into a single loan—still backed by the federal government. This is helpful because it can make certain types of loans eligible for repayment plans they otherwise wouldn't qualify for. You end up with one payment, and your interest rate is roughly the same.

But if you consolidate your loans with a private lender thinking you're doing a Direct Consolidation Loan, you’ll lose all federal benefits.

In Part 2, coming next week, I’ll walk through the major drawbacks of refinancing student loans—namely the loss of income-driven repayment options.

Have questions in the meantime? Let me know.

*This article originally appeared on the Mouthing Off Blog written For Dental Students.