If you’re juggling numerous student loan payments each month, the idea of a single, streamlined monthly payment might sound appealing. Both student loan consolidation and refinancing can help, in addition to offering other benefits that can make repaying your student loans easier.
Before moving forward, however, it’s crucial to understand how consolidation vs. refinancing compare so you can better choose which solution makes sense.
Student loan consolidation and refinancing both allow you to combine all or some of your student loans into one new debt. This can simplify payments and help you better track your repayment, but there are some major differences between consolidation vs. refinancing to keep in mind.
Though the terms are sometimes used interchangeably, student loan consolidation refers to the process of combining federal student debt into a new Direct Consolidation Loan through the U.S. Department of Education. This process does not require a credit check, and your new loan’s interest rate will be the weighted average of your existing rates.
Student loan refinancing combines your existing loans into a new debt taken out with a private lender. Both federal and private loans are eligible, but qualification for refinancing — and the rates and terms you receive on your new loan — will depend on your credit profile. Additionally, if you refinance federal student loans, you’ll lose access to federal benefits and protections.
With those basic definitions in mind, here’s a look at the major pros and cons of student loan consolidation vs. refinancing:
| Student loan consolidation | Student loan refinancing | |
|---|---|---|
| Pros | ||
| Cons |
The process of student loan consolidation involves rolling one or all of your eligible federal loans into a Direct Consolidation Loan. This allows borrowers to streamline payments and work with only one loan servicer. Consolidation is only available for federal student loans; private student loans aren’t eligible.
To consolidate, you must apply through the Federal Student Aid website. The process doesn’t require a credit check, income assessment, or other financial review. Applicants simply must have eligible loans that are in active repayment or a grace period.
While you may qualify for a lower interest rate with student loan refinancing, the rate you receive through consolidation won’t offer any savings. Your new interest rate is the weighted average of the loans you’re consolidating, rounded up to the nearest one-eighth of a percent. While consolidating doesn’t save you money in interest, you will lock in a fixed interest rate, which allows for predictable monthly payments.
You can also extend your repayment term up to 30 years when you consolidate. This will lower your monthly payment, though you’ll likely pay more interest over the life of the loan. Consolidation can also open access to more repayment plans — for instance, borrowers who have Parent PLUS loans must consolidate to access options like Public Service Loan Forgiveness (PSLF) or income-driven repayment.
On the flipside, it’s also possible that consolidation can have a negative impact on your federal benefits. Borrowers who consolidate may lose credit for payments they’ve already made toward income-driven repayment forgiveness or PSLF.
Before consolidating, borrowers should also note that any unpaid interest will capitalize during the process — meaning it will be added to your loan’s principal balance. If this happens, you’ll pay interest on a higher principal balance, which can lead to higher interest costs over the life of the loan.
With private student loan refinancing, borrowers can combine one or more of their loans into a new debt with a private lender. The new loan will have a different term and interest rate, which could be lower than what you’re currently paying. Both federal and private loans are eligible for refinancing, and combining multiple debts can simplify your payments.
To apply for a refinance loan, your credit score, income, and existing debt will be evaluated by the lender before you’re approved. Generally, you’ll need a good credit score to qualify, typically in the mid- to high-600s or greater. In some cases, lenders may also require you to be a U.S. citizen.
If you can’t meet these requirements on your own, adding a cosigner to your application may help you get approved or lock in a lower rate. Alternatively, you can drop an existing cosigner when you refinance — if you have one — assuming your credit is now strong enough to qualify.
While federal loans have fixed interest rates — which never change during repayment — private student loans offer fixed or variable rates, which can fluctuate over time. If you opt for a variable-rate loan when you refinance, your interest rate (and monthly payment) could increase at the lender’s discretion.
Refinancing federal student loans also carries some added risk. Doing so turns your federal loans into private debt and you’ll lose access to federal protections, including more flexible deferment and forbearance, loan forgiveness programs, and income-driven repayment options.
Private lenders may offer a choice of repayment plans or provide help if you can’t afford your loans, but they typically aren’t as generous as federal options.
Related: Learn more about refinancing your student loans
When exactly does it make sense to consolidate? Here are some scenarios where it could be beneficial:
In other situations, refinancing might be the better option. Here are some instances where it could make sense to opt for refinancing over consolidation:
Related: Learn more about refinancing your student loans