Refinancing vs. Consolidating Student Loans: What’s the Difference?

When you’re paying off your student loans, restructuring the debt can help you save on interest and monthly payments. Student loan refinancing and consolidation are the two main options you have to do so.

Both work by replacing your existing loans, but in different ways. Each offers some important benefits, but they aren’t right for every situation. If you’re exploring the best way to tackle your student loans, keep reading to learn about how refinancing and consolidation work and which is right for you.

Current student loan refinance rates

What is student loan refinancing?

Student loan refinancing is when you replace one or more existing federal or private loans with a new private loan. Essentially, you use the new loan to pay off your existing loans.

Your refinance loan has new terms, including a new interest rate, repayment term, and monthly payment. Refinancing often allows you to lower your monthly payment, making repayment more affordable. If someone cosigned your original private loan, refinancing could also offer the opportunity to release your cosigner from their legal responsibility for the debt.

Private student loans can have either fixed or variable interest rates. A credit check is required, and your eligibility and interest rate are determined largely by your credit history.

What is student loan consolidation?

Student loan consolidation is the process of combining multiple federal student loans into one Direct Consolidation Loan. Rather than making multiple monthly payments at different interest rates, you’ll have just one (ideally lower) monthly payment.

Direct Consolidation Loans have a fixed interest rate that’s the weighted average of your current rates. This new loan can give you access to additional loan repayment and forgiveness options, including income-driven repayment and longer repayment terms on standard or graduated repayment plans.

Refinancing vs. consolidation: What’s the difference?

When does refinancing make sense?

Student loan refinancing can help you lower the interest rate on your student loans. It’s often a smart financial move when you have high-interest private loans, but it has some major downsides for federal loans.

“Refinancing makes more sense if the borrower can qualify for a lower interest rate and has no need for the superior benefits of federal student loans, such as Public Service Loan Forgiveness and income-driven repayment,” says Mark Kantrowitz, financial aid expert and author of “How To Appeal for More College Financial Aid.”

Generally speaking, you might be in a good position to refinance your student loans if you have strong credit, a stable income, and high-interest loans that you want to get a lower rate on. 

Refinancing may also be suitable for combining federal and private loans at a lower rate, but as Kantrowitz notes, you should only consider it if you know you won’t need access to any of the federal loan benefits or protections.

When does consolidation make sense?

Loan consolidation is often the best choice for borrowers who simply want to repay their federal student loans in the most efficient way.

“It’s a way to simplify managing loans,” says Jack Wang, a financial adviser who specializes in helping families with college financial aid. “Instead of having payments go to multiple loans, the borrower just has to manage one loan.”

Consider consolidating your loans if you have multiple federal student loans and want access to the most repayment options, including income-driven and extended repayment plans. It’s also worth considering if you want the safety net of possible loan forbearance, deferment, or even forgiveness.

Finally, since federal loans have competitive interest rates, you may not be able to find a lower rate through a private lender, so it’s likely the best option to stick with your federal loan.

Wang also points out some other situations where consolidation makes sense. For example, it’s one way for federal borrowers to get their loans out of default and get back on track with repayment. And for parent PLUS loan borrowers, consolidation is the only way to access income-driven repayment (IDR) plans and qualify for Public Service Loan Forgiveness.

Which is better, student loan refinancing or consolidation?

When deciding whether to refinance or consolidate your student loans, it’s important to account for a variety of factors, including your current interest rate and loan amount, your income and credit, your line of work (certain professions qualify for loan forgiveness programs), and more.

“Whether a borrower should consolidate or refinance really depends on their goal,” says Wang. “If their credit is good and they qualify for a lower rate, then refinancing can make sense. However, if a borrower needs to be on an IDR plan or is pursuing student loan forgiveness, consolidating their federal loans while refinancing only private loans makes sense, he adds.

In most cases, consolidation is better for federal loans, while refinancing is better for private loans. But there may be exceptions where refinancing your federal loans with a private loan is the right option.

Pros and cons of student loan refinancing

Pros

• Potentially lower interest rate and payment: Refinancing your loans can help you reduce your interest rate and lower your monthly payment.
• Available for any loan type: You can use refinancing for both private and federal loans, and can even refinance them together into one loan.
• Multiple loan terms: Private loan terms generally range from 5 to 20 years, meaning you have plenty of options.
• Cosigner release: If you have a cosigner on your current private loans, refinancing can help release them. You could also maintain your cosigner, but refinance with a lender that offers cosigner release as a loan feature.

Cons

• Loss of federal protections: If you have federal student loans, refinancing them with a private loan will mean giving up your federal loan benefits, such as forgiveness opportunities.
• Fewer repayment options: Despite the variety of repayment terms, private refinance loans don’t offer income-driven repayment or allow you to change repayment plans.
• Requires a credit check: You’ll have to qualify for a private refinance loan with a credit check, which will also affect your interest rate.

Pros and cons of student loan consolidation