Student loan refinancing vs. consolidation: What’s the difference?

Refinancing and consolidation are terms often used interchangeably with credit cards, personal loans, auto loans and other kinds of debt. However, the two words describe two different processes with student loans.

In general, a student loan refinance involves a private lender, and you can refinance both federal loans and private loans. In contrast, student loan consolidation is only available to federal student loan borrowers. Here’s what to know if you’re looking for ways to make your student loan repayment plan more effective.

Student loan refinancing vs. consolidation

What is student loan refinancing?

Student loan refinancing is the process of replacing one or more existing student loans with a new loan through a private lender.

Advantages of refinancing

Refinancing your loan is a path to getting a lower interest rate and simplifying your monthly payment. You can use refinancing as an opportunity to shorten or lengthen your repayment term, depending on what best suits your financial situation. Refinancing also allows you to take advantage of other features private lenders might provide.

Disadvantages of refinancing

While refinancing has its benefits, there are also some potential downsides. The most important one is that if you’re refinancing federal student loans, you’ll no longer have access to the benefits the federal government provides. That includes student loan forgiveness programs, student loan repayment assistance programs, income-driven repayment plans and generous deferment and forbearance options.

How to refinance a student loan

Most private student loan companies allow you to get prequalified before you submit an official application. This process requires just a soft credit check, which won’t impact your credit score. If you don’t qualify for student loan refinancing on your own, you can apply with a creditworthy co-signer.

When you apply for a loan, you’ll need to provide your income and other personal information so the lender can determine whether you qualify and, if you do, what your interest rate will be. Your credit score is a major factor here; the higher your credit score, the lower the rates you could receive through refinancing.

What is student loan consolidation?

Student loan consolidation refers solely to the Direct Loan Consolidation program provided by the Department of Education. Like refinancing, consolidation allows you to replace one or more existing loans with a new one, but you may consolidate only federal student loans.

Advantages of consolidation

Getting a Direct Consolidation Loan can be beneficial in a few different ways. A direct consolidation loan allows borrowers with loans that aren’t in the Direct Loan program to gain access to income-driven repayment plans. This makes it possible to swap older loans with variable interest rates with a new one with a fixed rate, allows you to extend your repayment term up to 30 years, and lowers your monthly payment. Consolidation can also help you get your student loans out of default.

Disadvantages of consolidation

When you consolidate federal student loans, the interest rate on your new loan will be the weighted-average rate across all of the loans you’re consolidating, rounded up to the nearest one-eighth of a percent. This means that you won’t be able to get a lower interest rate through consolidation.

How to refinance a student loan

Submit your paperwork, including IDs, student loan details, and employment information to a lender. They will determine if they are willing to move forward with the process and will generate the paperwork for you to sign before establishing the new terms of your loan.

Should I refinance or consolidate my student loans?

The decision of whether to refinance or consolidate student loans depends on your current situation, goals and loan types.

You may choose to refinance your student loans if:

• You have only private student loans.
• Your credit is in good shape and you can qualify for a better interest rate.
• You want to pay off your loans early with a shorter repayment period.
• You don’t qualify for student loan forgiveness or loan repayment assistance programs.
• You don’t anticipate needing an income-driven repayment plan.
• You’re a parent who borrowed on behalf of your child to pay for their education, but you’ve both agreed now to transfer the debt into their name.

You may choose to consolidate your student loans if:

• You have federal student loans.
• You may qualify for a loan repayment assistance program.
• Your credit score isn’t good enough to refinance but you want to simplify your life with just one monthly payment.
• You want to pursue income-driven repayment or loan forgiveness.
• Your federal loans are in default.
• You don’t mind a slightly higher interest rate.

The bottom line

Both refinancing and consolidation can help you with your student loan debt, albeit in different ways. While refinancing is designed to help you save money and give you a lot of flexibility with your repayment term and monthly payments, it’s not available to people whose credit scores don’t meet lenders’ criteria. What’s more, you’ll lose access to federal loan benefits.

With consolidation, you won’t save any money — in fact, you could end up paying more — but it can make it possible to achieve your goals without losing the perks you can get from the Department of Education.

If you’re trying to decide between refinance and consolidation, take some time to research both options and compare student loan refinance rates before you proceed. Every situation is different, so while one may be a good fit for a family member or friend, that doesn’t mean it’s the right call for you.