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To answer the question of which is best for you – a refinance or a consolidation loan – it helps to first understand the primary benefits of each and the main difference between refinancing and consolidating student loans. So here is a helpful explanation.

How does student loan refinancing work?

When you refinance a student loan, you take out a brand new loan. At the time the new loan is funded the entire balance of your old loan is paid off by the new one, leaving you still owing essentially the same amount of money – but with a new interest rate and different repayment terms and conditions. The goal, therefore, is to refinance your student loan into one that has more favorable terms and a lower interest rate, to save you money and make loan repayment easier to manage.

What does student loan consolidation mean?

Consolidation, on the other hand, is a strategy used when you owe balances on more than one student loan. As you may have experienced, since each of those separate loans has its own monthly payment, interest rate, and terms it can be complicated to manage all of them. But consolidation takes all of that diverse debt and puts in into one basket, namely a single loan with just one payment to worry about making each month. The goal is to simplify your financial life and make it much easier to keep tabs on your student loan debt.

When should you refinance?

Refinancing offers a way to start over with a new interest rate and terms. So that makes it an ideal solution if you have a student loan with an interest rate or monthly payment that is too high. Reducing the interest rate on an expensive loan can potentially save you thousands or even tens of thousands of dollars over the life of the loan. If you select the right kind of loan you may also be able to reduce your monthly payment in two fundamental ways. You can refinance into a student loan with a lower interest rate, or you can refinance into one with a longer repayment period. Both of those tactics typically result in a lower monthly payment.

When is consolidation the best option and solution?

When you are juggling a bunch of different student loans, that can be aggravating and time-consuming. You have lots of different loans to monitor, various payment due dates, and varying amounts you have to pay each month. Does that sound familiar? If so, you may be an ideal candidate for student loan consolidation. Rather than endure all of that hassle, why not just consolidate? You’ll wind up with only one student loan to keep track of and one check to write or online payment to make each month.

What are some other benefits of consolidating or refinancing?

If you currently have a 5-year loan, for example, and refinance into a 10-year loan, that gives you twice as much time to repay – which means you pay a smaller monthly installment. Similarly, if you manage to lower your interest rate that will reduce your costs since you have to pay less interest on the loan. As far as student loan consolidation goes, all of your loans will be rolled into one. The interest rate you are charged is usually calculated by averaging out the rates of the different loans you were paying before they were consolidated, and it will also depend on your credit score, credit history, and other relevant information about your financial profile.

Perhaps you have improved your credit history and are earning more now than you were when you graduated, for instance. In that case you may be entitled to a lower, more preferential rate and more attractive terms. That could apply to both a consolidation or a student loan refinance, and you can find out quickly and easily online, and even process the loan from application all the way through funding, without ever having to sit across the desk from a banker or loan officer.


Please note that the information provided on this website is provided on a general basis and may not apply to your own specific individual needs, goals, financial position, experience, etc. LendKey does not guarantee that the information provided on any third-party website that LendKey offers a hyperlink to is up-to-date and accurate at the time you access it, and LendKey does not guarantee that information provided on such external websites (and this website) is best-suited for your particular circumstances. Therefore, you may want to consult with an expert (financial adviser, school financial aid office, etc.) before making financial decisions that may be discussed on this website.