Student loan consolidation and student loan refinancing are two different tactics to help borrowers with their student loan payments. In some cases, student loan consolidation makes sense. In other cases, student loan refinancing is best. To figure out if either are right for you, here’s an explanation of each:
Student loan consolidation refers to the combining of your multiple student loans into one loan.
A lot of borrowers take out a different student loan for each year of college, so by the time you graduate, you could have four (or more) student loans. Four student loans means four different payments and four different sets of paperwork to keep track of – resulting in four huge pains in the neck.
Student loan consolidation is designed to reduce this pain and make your life easier by merging all of your student loans into one single loan, with one payment. It mostly applies to borrowers with federal student loans and allows you to keep all of the benefits that your federal loans offer (such as income based repayment plans and student loan forgiveness).
It’s important to note that consolidation doesn’t typically save you any money: by only combining the loans, you’re still paying the same total amount and same total interest, but you just have one loan instead of multiple loans. You can, however, change the repayment plan on this new single loan to possibly lower your payments or extend your term, but that’s a separate process from the consolidation itself.
With student loan refinancing, you’re taking out a brand new student loan to pay off all of your separate existing loans. This method doesn’t combine your loans, but rather creates a brand new loan for you.
The new loan payment and interest rate will be based on your credit score, so having great credit could mean substantially lower payments.
The benefits of student loan refinancing include:
Student loan refinancing must be done through a private student loan lender (the government doesn’t offer this program to borrowers). You can, however, refinance your federal loans into new private loan, which could make sense for some borrowers.