You’re probably heard both terms: student loan consolidation and student loan refinancing. A lot of people use them interchangeably, which adds to the confusion.

However, student loan consolidation and student loan refinancing are two different tactics that borrowers can take to help them with their student loan payments, and they each apply in different situations.

In some cases, student loan consolidation makes sense. In other cases, student loan refinancing makes sense. To figure out if either are right for you, here’s a breakdown of what they each are.

Student Loan Consolidation

Student loan consolidation is what you hear about the most – consolidating your multiple student loans into one. For a lot of borrowers, you take out a different student loan for each year of school – so by the time you graduate you could have 4 or more student loans.

That means you have 4 different payments to make, and for different sets of paperwork to keep track of. That can be tough. Student loan consolidation is designed to make this easier by consolidating all of your student loans into one single loan, with one payment.

Student loan consolidation mostly applies to borrowers with Federal student loans. The government allows you to consolidate your multiple student loans into one, while keeping all the benefits that your Federal loans offer (such as income based repayment plans and student loan forgiveness).

It’s important to note that this option doesn’t typically save you any money. By combining the loans, you’re still paying the same total amount and same total interest. You just now 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 separate from the consolidation itself.

Student Loan Refinancing

Student loan refinancing is a bit different than consolidation in that you take out a brand new student loan, and use that new loan to pay off all of your existing loans. This method doesn’t combine anything, 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 this include:

  • Possibly having a lower interest rate and payment on your new loan
  • Still getting a single bill for everything

With student loan refinancing, you have to do this through a private student loan lender. The government doesn’t offer this program to borrowers. If you have private student loans, this is your only option to get a single loan.

You can, however, refinance your Federal loans into new private loan, which could make sense for some borrowers.

Which Makes More Sense For You?

Now that you understand the difference between student loan consolidation and student loan refinancing, which option is best for you?

If you have Federal student loans and you rely on income based repayment plans or are planning on getting student loan forgiveness, you want to stick with your Federal loans. In this case, student loan consolidation might make the most sense.

If you have multiple private student loans (or even a single loan at a high interest rate), student loan refinancing is the only option for you.

If you have a combination of Federal and private loans, and you want a single loan, you can look for student loan refinancing. It may make financial sense for you, but remember that you lose the perks you get with the Federal student loans. However, an overall lower payment may be well worth it.

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