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- Loan consolidation allows you to combine existing federal student loans into a new loan with a single monthly payment
- Refinancing is available through private lenders and allows you to combine both federal and private loans
- The right choice depends on your financial circumstances and goals, as well as your creditworthiness
Student loan consolidation and refinancing are your two options for restructuring your existing loans and monthly payments. Although these terms are sometimes used interchangeably for other types of loans, they represent two distinct processes for student loans.
Consolidation is a way of combining your existing federal loans into one new federal loan with one rate and monthly payment. Refinancing can do something similar, but it also works with private loans and offers more options in terms of rates and repayment terms. Before you decide which route to go, make sure you understand the ins and outs of each.
How Does Student Loan Consolidation Work?
Student loan consolidation is offered by the U.S. Department of Education through the William D. Ford Federal Direct Loan Program. They’re known as Direct Consolidation Loans, and they offer a way to combine all your existing federal loans into one new balance with a single interest rate and one monthly payment. This also works with older federal loans outside the Direct Loan program, such as a Federal Family Education Loan (FFEL) or Perkins Loan.
Consolidation may give you access to income-driven repayment plans or extended repayment terms, which can lower your monthly payment. And, although it won’t lower your average interest rate, it does allow you to convert any variable-rate loans into a single fixed rate that’s based on a weighted average of your existing federal loans.
Pros And Cons Of Consolidation
Consolidation has some excellent benefits, but it’s not without its drawbacks. Here are some of the key pros and cons.
Pros
- Single monthly payment with one fixed interest rate
- Potential to extend repayment period and lower monthly payment
- Combine various types of federal loans to simplify loan and repayment management
- No fees
Cons
- Won’t lower your interest rate — weighted average rounded up to the nearest eighth of a percent
- Potentially more interest overall due to larger loan balance and extended repayment period
- May lose benefits of some other federal loans
How Does Student Loan Refinancing Work?
Technically, refinancing does consolidate your existing loans. However, this process involves a lender paying off your existing loan balances using a new, separate loan.
Refinancing is only available through private lenders, but you can use it to combine existing private and federal loans into a single loan with one monthly payment and interest rate. Unlike federal loan consolidation, it will require a credit check and a review of your financial situation, so you may need a co-signer if you don’t have a strong credit history.
Because private lenders offer a variety of interest rates based on creditworthiness, refinancing may give you access to lower rates than loan consolidation. However, these loans may carry origination fees, and they won’t offer the same benefits that federal loans have in terms of possible loan forbearance and forgiveness or income-driven repayment programs.
Pros And Cons Of Refinancing
Like loan consolidation, refinancing has its own set of advantages and drawbacks. Here are some of the biggest pros and cons to consider.
Pros
- Access to lower interest rates if you or a co-signed have good credit
- May be able to extend repayment period or pay off your loan faster with low rates
- Simplified, single monthly payment with one interest rate
Cons
- Lose access to federal loan benefits
- Credit check can hurt your credit score
- May have fees
Student Loan Consolidation Vs. Refinancing: Which Is Right for You?
Both consolidation and refinancing offer some important benefits to student loan borrowers. Which one is right for you will depend on your situation.
Student Loan Consolidation And Refinancing Compared
| Loan Consolidation | Loan Refinancing | |
|---|---|---|
| What it is | Government program for combining existing federal student loans into one new loan with new rate and terms | Using private lender to pay off existing private and federal loans and combine them into one new private loan with new rate and terms |
| Works for | Federal loans | Private and federal loans |
| Fees required | No | Usually |
| Credit check required | No | Yes |
| Lower interest rate | No — weighted average of current loans, rounded up to nearest 1/8% | Possibly, with good credit or a strong co-signer |
| Includes federal loan protections and benefits | Yes | No |
| One monthly bill | Yes | Yes |
If you only have private student loans, then your decision is easy — refinancing is your only option. However, if you have federal loans or a combination of both, you’ll need to evaluate your situation and goals more thoroughly.
Consider consolidating your loans if:
- You can use it to qualify for federal loan benefits (or may want access to these benefits in the future). For instance, if you have older federal loans that aren’t currently eligible for income-driven repayment, you may be able to consolidate and gain access to this program.
- You don’t have a high credit score or a potential co-signer. Since Direct Loan Consolidation doesn’t require a credit check, you won’t need to worry about this.
- You have variable-rate federal loans and want to quickly convert them to a single fixed rate. Loan consolidation allows you to do this simply without any fees or credit checks.
Consider refinancing your student loans if:
- You have good credit or a strong co-signer. This can give you access to the best interest rates and lower your long-term loan costs.
- You want to change loan ownership. If you have some federal loans through your parents and some in your name, you can only combine them all into your name through private refinancing.
- You’d like to pay off your loans earlier. Private loans offer shorter repayment terms and lower rates, so this may be a better option for you.
- You won’t need access to federal loan benefits. If you don’t expect to apply for loan deferment or forgiveness at any point, private loans may offer better terms.
Regardless of which option you choose, both programs allow you to streamline your loan repayment plan and set up new loan terms that work for you. If you’re struggling to keep track of several loan payments or manage a high monthly payment, it’s worth exploring your options for loan consolidation and refinancing.
Frequently Asked Questions (FAQs)
Will My Student Loans Be Forgiven If I Consolidate?
Consolidating older federal loans such as FFEL or Perkins Loans may give you access to loan forgiveness that you couldn’t have otherwise utilized. Private refinancing will not afford you this option.
Will Consolidating Or Refinancing Student Loans Hurt My Credit?
Consolidating your loans won’t affect your credit score, as this doesn’t require a credit check. However, private lenders will run a hard credit check when you apply for a refinance, and this may have a small impact on your credit score. Either one will impact your score positively in the long run if it prevents you from defaulting on your loans.
