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Student Loan Consolidation vs Refinancing


When discussing student loan consolidation versus refinancing, either might be a good option for you, as long as you understand their differences.

  • Consolidation is best as a strategic move. It consolidates several federal loans into a new federal loan to allow you to make a single payment or benefit from government programs.

  • Student loan refinancing is best for saving money. It replaces one or more existing federal or private loans with a new private student loan, ideally with a lower interest rate.

There are many reasons why you should or should not consolidate or refinance your student loans. Here’s what to know about each option and how to decide if it’s right for you.

Consolidation and refinancing are different

You may have heard the words “consolidation” and “refinance” used interchangeably, but they are actually two separate repayment options.

Here is a breakdown of some key differences between consolidation and refinancing:

Student loan consolidation

Combines multiple federal loans into one federal loan.

Combines private and/or federal loans into one private loan.

What loans can I combine?

Private and/or federal loans.

No. Consolidation may lower your payments by extending the term of the loan, but your interest amount will increase.

Can I access federal loan protections, repayment options and rebate programs?

Will I pay one monthly bill?

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Federal Consolidation vs Private Consolidation

Federal loan consolidation is a government process. Private Consolidation, or student loan refinancegoes through private lenders.

To obtain a federal student loan consolidation, apply on the Federal Student Aid website. Only federal student loans are eligible for this option, and you qualify for this option if you qualify.

Private loan consolidation requires approval from a lender. Potential lenders will assess your eligibility and offer you a new loan with terms based on factors such as your credit history and debt-to-equity ratio.

Estimate how much refinancing could save you

When to consolidate instead of refinance

Consolidation has its advantages and disadvantages. The biggest advantage of consolidation over refinancing is retaining the benefits of federal loans. But consolidation may also be the best option in these cases:

  • You’re juggling multiple federal loans. If you took federal loans for more than a year in school, you may have to deal with multiple payments, interest rates, terms, and loan managers. Federal consolidation would give you a monthly bill to manage.

  • You are not eligible for a federal program. Most income-based repayment plans and loan forgiveness programs are for direct federal loans. If you have a loan from the Federal Family Education Loans Program, you can upgrade to a direct consolidation loan to access these options.

  • You want a new federal loan officer. The government will assign a company to service your federal student loans. If you don’t like the customer service he provides, you can change student loan officer by consolidating your federal loans.

When to refinance instead of consolidate

You already have private student loans. Most private lenders refinance federal and private loans. Federal loan refinancing requires caution, as you will lose benefits such as income-tested plans and loan forgiveness programs. Private loans do not have these options, which makes private credit consolidation a no-brainer if you can get a lower rate.

You are looking to save money. Federal loan consolidation will not reduce your interest rate. You will receive the weighted average the rates of the loans you combine. Private lenders will offer you an interest rate based on your financial profile. This could decrease your monthly payments and the amount you repay overall.

You want to change the owner of the loan. There is no way to change who is responsible for paying a federal loan. For example, you cannot consolidate your undergraduate loans with PLUS loans that your parents took out for you. Refinancing would allow you to take back these loans. It could also remove a co-signer from existing private loans.