Geeky Insight:

Student Loan Consolidation vs. Refinancing — Which Is Best?

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Class of 2017 college graduates faced the highest levels of student loans we’ve ever seen last year — $39,400 on average according to recent stats. Nationwide, student loan debt has become a $1.5 trillion-dollar crisis, and one that borrowers can’t seem to escape from. It’s nearly impossible to discharge student loans in bankruptcy, as many know, and the rising costs of college make “paying as you go” just as difficult.

In the end, this means one thing —borrowers everywhere (an estimated 44 million) have no choice but to pay down their loans the hard way, and often for up to thirty years.

Student Loan Consolidation vs. Refinancing

Fortunately, there are a handful of options borrowers can access to make their loans less painful. There are loan forgiveness programs for graduates in certain professions and the military, for example. There are also income-driven repayment plans that allow you to pay a percentage of your discretionary income for 20-25 years before forgiving your remaining balances altogether.

There are also extended repayment plans that allow you to secure lower monthly payments if you spread out your debt over a few decades. Finally, you also have the option to consolidate or refinance your student loans.

While these two options – refinancing and consolidating – may sound very similar, they work rather differently. With federal student loan consolidation, you’re bundling your existing federal student loans into a new government loan. When you refinance, on the other hand, you’re replacing your federal student loans with a new loan from a private lender.

Which option is right for you? At the end of the day, it depends on your goals and how quickly you want to pay your student loans off. If you’d like to look at which serves you best, take a look at our student loan consolidation vs refinancing calculator.

Federal Student Loan Consolidation

When someone mentions consolidating their federal student loans, what they’re usually talking about is applying for a Direct Consolidation Loan from the federal government. These loans let you combine multiple federal student loans into a new loan with one monthly payment and a new interest rate.

Applying for a Direct Consolidation Loan doesn’t require an application fee, and it’s a fairly simple process since the federal government has all your loan data already. Nearly any type of federal student loan is eligible for consolidation with a Direct Consolidation Loan as well. This includes:

  • Subsidized Federal Stafford Loans
  • Unsubsidized Federal Stafford Loans
  • PLUS loans from the Federal Family Education Loan (FFEL) Program
  • Supplemental Loans for Students
  • Federal Perkins Loans
  • Nursing Student Loans
  • Nurse Faculty Loans
  • Health Education Assistance Loans
  • Health Professions Student Loans
  • Loans for Disadvantaged Students
  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • Direct PLUS Loans
  • FFEL Consolidation Loans and Direct Consolidation Loans (only under certain conditions)

There are pros and cons that come with Direct Consolidation Loans, but the most important detail to note is that you won’t secure a lower interest rate with this option. Direct Consolidation Loans use the weighted average of your current rates, meaning you’ll pay the same amount of interest you were paying before. However, you can switch any variable rate loans you have over to a fixed interest rate.

But, there are advantages that come with consolidating existing loans — particularly if you’re juggling several and feeling overwhelmed. Here are the main advantages and disadvantages of consolidating federal loans.

Advantages of Direct Consolidation Loans:

  • Pay one monthly payment instead of several. Consolidating your loans can simplify your life since you may go from juggling several payments to just one. Having one monthly payment to keep up with can make paying bills and managing your cash flow considerably easier.
  • Repay your loan balances for up to thirty years. Direct Consolidation Loans may let you repay your balances for up to thirty years, which can make sense if you need extra time to repay.
  • You may qualify for a lower monthly payment. Having the option to spread your loan payments out over a longer timeline can also help you secure a much lower monthly payment. Keep in mind, however, that longer repayment timelines can mean paying more interest charges over time.
  • Benefit from a fixed interest rate. Direct Consolidation Loans come with fixed interest rates you can depend on. You’ll never have to worry about your rate going up or down in the future.

Disadvantages of Direct Consolidation Loans:

  • You’re not saving money on interest. Since your new loans use the weighted average of your current interest rates, a Direct Consolidation Loan won’t help you save money on interest.
  • You could wind up paying your loans off for much longer than you would otherwise. If you recast your loans into a new Direct Consolidation Loan with a longer repayment timeline, you could wind up repaying your loans for decades to come. You’ll also pay more interest over time if you take forever to pay them off.
  • Consolidating means losing out on the potential to pay down higher rate loans faster. When your student loans are at different interest rates, you have the option to pay down higher rate loans faster with the debt avalanche method. Consolidating your loans with a single interest rate removes that option.

At the end of the day, Direct Consolidation Loans are mostly good for individuals who don’t mind spending several decades paying their loans off if it means getting a lower monthly payment. If you decide to consider this option, you apply for a Direct Consolidation Loan online through

Student Loan Refinancing

While consolidating federal loans is a streamlined process, refinancing your loans is an entirely different animal. When you refinance your student loans, you are replacing your existing loans with a new loan from a private lender. One big downside is that, if you are refinancing federal student loans, this means giving up on certain federal benefits such as forbearance, deferment, and income-driven repayment plans.

On the upside, refinancing can help you qualify for a lower interest rate that could help you save money on your loans over time. This is predicated on the fact you have a good credit score or a cosigner, however. Also keep in mind that there are many private student loan refinancing companies competing for your business, so it’s possible to get an awesome interest rate and even a “signup bonus” for refinancing your loans into a new loan product.

Still, it’s important to note that refinancing your student loans isn’t always the best idea. Here are some of the main advantages and disadvantages to be aware of:

Advantages of refinancing your student loans:

  • You may be able to qualify for a much lower interest rate than you’re paying now. Most federal student loans offer interest rates between 5% and 7%. However, some private lenders like SoFi offer fixed interest rates as low as 3.899% with auto-pay.
  • You can apply and get approved for a new loan online. It’s easy to research companies and apply for student loan refinancing online.
  • Pay your loans off faster. With a lower interest rate, a larger portion of your monthly payment will go toward your balance instead of interest each month. This means you have the potential to pay your loans down faster.
  • You may qualify for a lower monthly payment. With a lower interest rate, you will likely also have a lower monthly payment. While you should strive to pay your loans off as quickly as possible once you graduate, having a low minimum payment can make life easier if money gets tight.

Disadvantages of refinancing your student loans:

  • You give up federal student loan benefits when you refinance with a private lender. As we mentioned already, refinancing loans with a private lender causes you to lose out on federal loan benefits such as income-driven repayment plans, deferment, and forbearance.
  • You lose your grace period. While some federal student loans let you wait to start making payments while you’re in school, this is not the case with private loans. When your refinance is over, you will be expected to start making monthly payments right away.
  • You need a good credit score to qualify without a cosigner. While low interest rates advertised by student loan refinancing companies can be alluring, keep in mind that these rates are only available to consumers with the best credit scores or a solid cosigner. If your credit is fair or poor, it’s very unlikely you’ll qualify for a loan with the best rates and terms.

The Bottom Line

If you are struggling with student loan debt, it’s important to understand all your options. In addition to extended repayment plans and income-driven repayment plans offered through the federal government, you can also consider a Direct Consolidation Loan or the prospect of refinancing with a third party.

While a consolidation loan can make sense if you want to repay your loans over the long haul, refinancing can be a good short-term move if you are someone who wants to save on interest payments so you can demolish your loan payments as quickly as they can. Consider the pros and cons, explore all your options, then decide which path is best for you to take.