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What’s the difference between student loan refinancing and consolidation?

    You may hear the terms refinancing and consolidation regarding student loans. These are important options, as you may want to consider one of them for various reasons, including if you’re struggling to pay off your student loans.

    In this article, we’ll break down the differences between consolidation and refinancing and the pros and cons. As you consider your options, you may want to seek guidance from a financial adviser to make the most informed decision for your situation.

    What’s the difference between consolidation and refinancing?

    Although the terms consolidation and refinancing are sometimes used in a similar way when discussing student loans, they can mean different things when considering consolidating private student loans, federal student loans, or some combination.

    These two options likely come with different terms and conditions, so it’s important to understand the differences. In the world of student loans, when the term consolidation is used, it usually refers to an option provided by the U.S. government to combine federal student loans into a Direct Consolidation Loan, an option only federal student loans are eligible for. When the term refinancing is used, it typically refers to an option for combining federal student loans and private student loans or just private student loans. For this article, we’ll stick to this differentiation.

    Student loan consolidation

    Regarding federal student loans, you can consolidate (combine) most federal student loans into a new federal Direct Consolidation Loan to potentially lower your monthly student loan payment or gain access to federal student loan forgiveness programs. Generally, you can only consolidate your eligible federal student loans after you graduate, leave school, or drop below half-time enrollment.

    The federal student loans you can consolidate must be in repayment or in a grace period, and the consolidation process is managed by a loan servicer.

    Unless the federal student loans you want to consolidate are in a deferment, forbearance, or a grace period, you’ll need to keep making payments until your loan servicer lets you know your consolidation is complete.

    Pros and cons of student loan consolidation


    • Single loan with one monthly bill: When you consolidate your federal student loans, you’ll merge your loans into one with one monthly payment, which may make it easier to manage. Keep in mind that you can’t consolidate private student loans into a federal Direct Consolidation Loan, and once your federal loans are consolidated, it can’t be reversed.
    • Potentially a lower monthly payment: Consolidation can lower your monthly payment by potentially giving you up to three decades to repay your loans, depending on your repayment plan.
    • Access to loan forgiveness options: If you consolidate federal student loans other than Direct Loans, you may be able to access additional income-driven repayment plan options and Public Service Loan Forgiveness (PSLF) if you’re eligible.
    • Access to income-driven repayment plans: By consolidating your federal student loans (other than Direct loans), you may have access to additional income-driven repayment plans. An income-driven repayment plan generally bases your monthly student loan payment on your income and family size. 


    • Potentially an extended repayment period: If you choose to repay your new consolidation loan on a standard or graduated plan, consolidation can increase the period of time you have to repay your loan, resulting in more payments and more interest overall than you’d have had if you didn’t consolidate. You also won’t be able to undo your decision.
    • Potentially, more interest will accrue: Because consolidation may lengthen your repayment time period, you may pay more interest over the long run. Any outstanding interest on the loans that you consolidate becomes part of the principal balance on your consolidation loan. This means that interest may accrue on a higher principal balance than if you’d not consolidated.
    • Loss of certain borrower benefits: When you consolidate you may lose benefits such as interest rate discounts, principal rebates, or some loan cancellation benefits. You may also lose credit for payments made toward income-driven repayment plan forgiveness or PSLF.

    Student loan refinancing

    Student loan refinancing is when you combine some or all of your federal and private student loans into a new private loan through a private lender or bank.

    By doing this, you may be able to lower your interest rate, lower your monthly payment by extending the repayment term length, or release a co-signer from your existing student loan — depending on the terms of the new loan.

    Of note, federal student loans can be refinanced. However, when they are, they’ll be refinanced into a new private student loan, so you’ll lose the benefits of having federal student loans if you choose to refinance. Before going forward with consolidating federal loans or refinancing, it’s a good idea to carefully weigh the pros and cons of doing this.  

    Pros and cons of student loan refinancing


    • Alter your payment plan: If you qualify for refinancing, you may be able to choose a new term for your loan (so it could be 5, 10, 20 years, or more, depending on the options). You might be able to decide how quickly you want to pay off your loans by making this change. A shorter timeframe likely means higher monthly payments, while a longer timeline likely means lower monthly payments.
    • Potentially a lower monthly payment: Consolidation can lower your monthly payment if you’re able to get a lower interest rate.
    • Less monthly payments: With refinancing, you may be able to streamline your payments and make one monthly loan payment to one lender or reduce the number of payments you’re making monthly.
    • Option to apply with a co-signer: Since your credit score and debt-to-income (DTI) ratio will likely be a factor when applying for refinancing, you may have the option to apply with a co-signer.


    • Not every borrower is eligible: Lenders will weigh your credit score and DTI ratio. Not every borrower will be eligible.  
    • Your credit score can influence your new interest rate: Depending on your situation, this could be a pro or a con. 
    • May lengthen your timeline for paying off loans: Refinancing your student loans may give you lower monthly payments, but it may also stretch out the time it takes to pay them off ultimately.

    Deciding whether student loan consolidation or refinancing is better for you

    The first place to start when weighing whether to consolidate or refinance your student loans may be to assess what kinds of student loans you have. If you just have private student loans, refinancing is your only option. If you’re interested in combining federal and private student loans into a single loan, refinancing is your only option. If you’re weighing what to do with federal student loans, you have both refinancing and consolidation to consider.

    You’ll want to weigh many other factors, too: your potential monthly payment, the total amount of interest you’ll pay over the life of the loan, and the other benefits and downsides that might be there with both options. For instance, federal student loans come with certain benefits, like being eligible for loan forgiveness, and by refinancing these loans and combining them into a private student loan, you’ll forfeit those benefits.

    Because deciding between refinancing and consolidation is such a big decision, you may want to consider speaking with a financial advisor about your options to make an informed choice.

    Final thoughts

    Regardless of which route you decide to take, if any, weigh your options and see which one best works for you now and in the long run.