Student Loan Consolidation Vs. Refinancing

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  • You can only consolidate federal loans; private student loans are not eligible for the program.
  • Refinancing student loans can earn you a lower rate than the original terms of your loan.
  • When you refinance federal loans with a private lender, you lose some critical protections for borrowers.
  • Learn more about Insider’s student loan coverage here.

The difference between loan consolidation and refinance can be confusing, especially because people sometimes use the terms interchangeably. However, they are two different processes, and depending on your financial goals, one may be better for you than the other.

What is student loan consolidation?

You can consolidate or combine multiple federal loans into one loan with a direct consolidation loan. There are no fees to consolidate your federal loans. If a private company offers to help you apply and charges a fee, that’s a red flag. Student loan consolidation does not require a credit check.

Keep in mind that you won’t save money by consolidating your student loans, but that doesn’t mean you can’t benefit from the process. You will have fewer payments to follow each month and if you are not satisfied with your loan servicer, you will receive a new one when consolidating.

If you consolidate loans other than direct loans, you may become eligible for income-based repayment plans and civil service loan forgiveness. If you already have direct loans, you can retain these benefits when consolidating.

If you have variable rate federal loans (which were last disbursed in 2006), consolidating will allow you to convert them to fixed rate loans. You can also reduce your monthly payments by opting for a longer repayment term, although this option will cost more in interest overall.

However, when you consolidate your loans, any unpaid interest becomes part of the principal balance of your new loan. This means that interest can accrue on a larger principal balance than if you hadn’t consolidated.

What is student loan refinancing?

If you’re looking for a lower rate on your student loans, you’ll want to refinance them. Depending on your current financial profile, private lenders may offer you better terms than your original loan. Refinancing a student loan will require a credit check, and your rates will be based on that.

You can switch from a fixed rate loan to a variable rate loan when you refinance, which may allow you to obtain a lower rate. However, as the name suggests, variable rate loans can fluctuate and you could end up paying a higher rate down the line than if you had stuck with a fixed rate loan.

Exercise caution before refinancing federal student loans. You will waive all current and future borrower protections from the government, such as COVID-19 related loan forbearance, currently in place until January 31, 2022, and federal student loan relief programs such as the forgiveness of public service loans.

You will also not be eligible for specific repayment options such as income-contingent repayment plans, which take into account your specific income and family size when determining monthly payments and protect you in the event of a Job Loss. Your interest savings might not be worth losing these benefits.

On the other hand, if you are refinancing private student loans, there is almost no downside. There are usually no refinance fees, and you may be able to get better rates on your new loan, especially if your credit score has improved since you got your original loan.

When deciding between refinancing or consolidating your loans, make sure you know the ins and outs of both processes and decide which is best for you.