Student Loan
Consolidation vs. Refinancing

Key Takeaways

• Federal student loan consolidation combines multiple federal loans into one new federal loan.
• Consolidation does not lower your interest rate — it uses a weighted average of your existing rates.
• Student loan refinancing replaces your loans with a new private loan, potentially lowering your interest rate.
• Refinancing federal loans means giving up federal protections like income-driven repayment and forgiveness.

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

Student loan consolidation refers to the combining of your multiple student loans into one loan. Federal student loan consolidation through the Direct Consolidation Loan program sets your new interest rate as the weighted average of your existing federal loan rates, rounded up slightly. It simplifies repayment but does not reduce your overall interest rate.

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.

Student Loan Refinancing

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. Private lenders also typically evaluate income, employment stability, and debt-to-income ratio when determining eligibility and interest rate.

The benefits of student loan refinancing include:

• Possibly having a lower interest rate and payment on your new loan
• Getting a single bill for all of your loans

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.

Which makes more sense for you?

• If you have federal student loans and rely on income-based repayment plans or are planning on getting student loan forgiveness, you’ll want to stick with your federal loans – and student loan consolidation is most likely your best choice.
• If you have multiple private student loans (or even a single loan at a high interest rate), student loan refinancing is your only option.
• If you have a combination of federal and private loans and you want a single loan, you can look for student loan refinancing. Keep in mind that refinancing federal student loans into a private loan permanently removes access to federal repayment plans, forgiveness programs, and certain hardship protections. However, an overall lower payment may be well worth the tradeoff.