The difference between student loan refinancing and consolidation

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When it comes to credit cards, personal loans, auto loans and other types of debt, refinancing and consolidation are terms often used interchangeably. But if you have student loans, the two words describe two different processes.

In general, a student loan refinance involves a private lender, and you can refinance both federal loans and private loans. In contrast, student loan consolidation is only available to federal student loan borrowers. Here’s what to know if you’re looking for ways to make your student loan repayment plan more effective.

What is student loan refinancing?

Student loan refinancing is the process of replacing one or more existing student loans with a new loan through a private lender.

The primary goals of refinancing your student loans can include:

  • Getting a lower interest rate.
  • Simplifying your monthly payment.
  • Shortening or lengthening your repayment term.
  • Taking advantage of other features private lenders might provide.

Unlike the U.S. Department of Education, private lenders offer a range of interest rates for those who qualify — and those rates can be variable or fixed. When you apply for a loan, you’ll need to provide your income and other personal information so the lender can determine whether you qualify and, if you do, what your interest rate will be. Your credit score is a major factor here; the higher your credit score, the lower the rates you could receive through refinancing.

The good news is that most private student loan companies allow you to get prequalified before you submit an official application. This process requires just a soft credit check, which won’t impact your credit score. If you don’t qualify for student loan refinancing on your own, you can apply with a creditworthy co-signer.

While refinancing has its benefits, there are also some potential downsides. The most important one is that if you’re refinancing federal student loans, you’ll no longer have access to the benefits the federal government provides. That includes student loan forgiveness programs, student loan repayment assistance programs, income-driven repayment plans and generous deferment and forbearance options.

What is student loan consolidation?

Student loan consolidation refers solely to the Direct Loan Consolidation program provided by the Department of Education. Like refinancing, consolidation allows you to replace one or more existing loans with a new one, but you may only consolidate federal student loans.

Getting a Direct Consolidation Loan can be beneficial in a few different ways. A Direct Consolidation Loan:

  • Allows borrowers with loans that aren’t in the Direct Loan program to gain access to income-driven repayment plans.
  • Makes it possible to swap older loans with variable interest rates with a new one with a fixed rate.
  • Can allow you to extend your repayment term up to 30 years, lowering your monthly payment.
  • Gives you access to the Public Service Loan Forgiveness program, which is only available through one federal loan servicer.
  • Simplifies your monthly payment.
  • Can help you get your student loans out of default.

Another big difference between student loan consolidation and refinancing is that student loan consolidation doesn’t require a credit check, and there is no range of interest rates. In fact, when you consolidate federal student loans, the interest rate on your new loan will be the weighted-average rate across all of the loans you’re consolidating, rounded up to the nearest one-eighth of a percent. This means that you won’t be able to get a lower interest rate through consolidation.

Should I refinance or consolidate my student loans?

The decision of whether to refinance or consolidate student loans depends on your current situation, goals and loan types.

You may choose to refinance your student loans if:

  • You have only private student loans.
  • Your credit is in good shape and you can qualify for a better interest rate.
  • You want to pay off your loans early with a shorter repayment period.
  • Your goal is to extend your repayment term to get lower monthly payments, but you don’t want to have to recertify your income every year as you would with income-driven repayment plans.
  • You don’t qualify for student loan forgiveness or loan repayment assistance programs.
  • You don’t anticipate needing an income-driven repayment plan.
  • You’re a parent who borrowed on behalf of your child to pay for their education, but you’ve both agreed now to transfer the debt into their name.

You may choose to consolidate your student loans if:

  • You have federal student loans.
  • You’re working toward student loan forgiveness or may qualify for a loan repayment assistance program.
  • Your credit score isn’t good enough to refinance but you want to simplify your life with just one monthly payment.
  • You want to pursue income-driven repayment or loan forgiveness.
  • Your federal loans are in default and consolidating them can stop collectors from calling.
  • You don’t mind a slightly higher interest rate.

The bottom line

Both refinancing and consolidation can help you with your student loan debt, albeit in different ways. While refinancing is designed to help you save money and give you a lot of flexibility with your repayment term and monthly payments, it’s not available to people whose credit scores don’t meet lenders’ criteria. What’s more, you’ll lose access to federal loan benefits.

With consolidation, you won’t save any money — in fact, you could end up paying more — but it can make it possible to achieve your goals without losing the perks you can get from the Department of Education.

If you’re trying to decide between refinance and consolidation, take some time to research both options and compare student loan refinance rates before you proceed. Every situation is different, so while one may be a good fit for a family member or friend, that doesn’t mean it’s the right call for you.

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Written by
Ben Luthi
Contributing writer
Ben Luthi is a personal finance and travel writer who loves helping people learn how to live life more fully. His work has appeared in several publications, including U.S. News & World Report, USA Today, Yahoo! Finance and more.
Edited by
Student loans editor