Student Loan Consolidation vs. Refinancing – Forbes Advisor


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For student loan borrowers, consolidating and refinancing student loans are two ways to manage payments if you have multiple loans. While these strategies are similar, they have some important differences and caveats.

If you’re thinking of consolidation vs. refinancing, make sure you know the distinctions before you submit an application.

Consolidation vs. Refinancing

Even though consolidation and refinancing have a lot of similarities, they differ in some key ways.

How Does Student Loan Refinancing Work?

Student loan refinancing is when you take out a new private student loan to pay off your current student loans. Your refinanced loans will have a new interest rate and repayment terms. Once your old loans are closed, you’ll begin making monthly payments on the new loan.

Pros of Refinancing Student Loans

  • Possibly lower interest rate. If you have good or excellent credit, you could qualify for a refinanced loan with a lower interest rate than what you’re paying now. The lower your interest, the less you’ll pay over the total life of your loan.
  • Combine your loans into one easy payment. If you have several student loans, keeping track of your different interest rates and due dates can get overwhelming. Refinancing means you can combine multiple student loans into one easy payment every month.
  • Change loan servicers. If you’re unhappy with your current loan servicer, the only way to move your debt to a different company is by refinancing your student loans. With good or excellent credit, you can compare many different lenders and compare the ones that offer the best interest rate, repayment terms and fewest fees.

Cons of Refinancing Student Loans

  • Lower interest isn’t guaranteed. Even if you qualify for refinancing, you might not be eligible for a better interest rate than what you’re paying now.
  • Lose federal protections. If you refinance your federal loans, you’ll lose access to all federal protections and benefits, including income-driven repayment plans, more flexible forbearance and Public Service Loan Forgiveness (PSLF).
  • A credit check is required. Refinancing requires a hard credit check. If you don’t have a strong credit history, you might not qualify without the help of a co-signer. And if you do, you may not get the full amount you requested or the lowest interest rate available.

How to Apply for Student Loan Refinancing

Refinancing can only be done through private lenders like banks, credit unions and online lenders. If you’re looking to refinance, consider the following:

1. Clean Up Your Credit

Before you look at lenders, check your credit score so you know where you stand before submitting a loan application. If your score is lower than you’d like, take steps to improve your credit before starting the refinance process.

2. Compare Lenders

Once your credit is in order, you can compare refinance lenders and shop around for the best rates. Requirements for student loan refinancing aren’t universal; make sure you’re eligible with each lender based on your creditworthiness, how much you want to borrow and your graduation status (some lenders don’t offer student loan refinancing to those without a degree).

You should also review what each lender offers in terms of interest rates, repayment terms and fees. If possible, complete a prequalification to see which lenders you might be compatible with.

3. Complete an Application

Once you have a few top lenders picked out, prequalify with them if you can. This process allows you to view estimated rates and terms you could qualify for. If all looks good, complete an application with each lender and wait for approval. Many lenders approve you within a few minutes while others might need more paperwork to complete your application.

Once you’re approved, you’ll receive the final terms and conditions of the loan. Review the paperwork and submit the final signed forms to your lender.

4. Pay Your New Lender

Your new lender typically pays off your old loans directly. It’s important to continue making payments on your current loans until your new lender notifies you that they’ve been paid off. Falling behind could make your loans delinquent before the refinancing goes through, so make sure you don’t hold up the process by missing payments.

How Does Student Loan Consolidation Work?

Student loan consolidation is when you take out a direct consolidation loan with the U.S. Department of Education and consolidate all of your federal student loans into one. Your new interest rate will be the average rate of your current loans, rounded up to the nearest one-eighth percent.

Pros of Student Loan Consolidation

  • Combine multiple student loans into one. Consolidating your debt combines multiple student loans into one. That means you’ll only have one payment to worry about each month.
  • Access to some federal benefits. Depending on the type of student loans you have, consolidating them can help you access additional federal benefits. For example, borrowers with parent PLUS loans must consolidate their debt to access income-driven repayment or Public Service Loan Forgiveness.
  • No credit check required. Like most other federal student loans, a credit check isn’t required to consolidate your debt. That means you can qualify even with poor credit.
  • Longest repayment terms offered. Direct consolidation loans have repayment terms of up to 30 years, which is longer than most private lenders offer. A longer repayment window will lower your monthly payment, but increase the amount of total interest you pay on the loan.

Cons of Student Loan Consolidation

  • Only federal loans are eligible. You can’t consolidate student loans you get from private lenders.
  • It compounds outstanding interest. When you consolidate student debt, any outstanding interest becomes part of the principal balance. That means you can be charged additional interest for your new, higher balance.
  • Potential loss of some federal benefits. Consolidation can negatively affect some of your existing federal benefits. For example, those enrolled in an income-driven repayment plan will lose credit for any payments you made before consolidation, delaying your eligibility for loan forgiveness. Other borrowers could lose certain interest rate discounts or loan cancellation benefits.

How to Apply for Student Loan Consolidation

To apply for student loan consolidation, you’ll need to make sure you’re registered on the Federal Student Aid website. You’ll need:

  • A valid Federal Student Aid ID
  • Personal details like your address, phone number and email
  • Financial information, including details on your current loans and repayment plans

Before you complete the application, review which of your loans you’d like to consolidate. Many people choose to consolidate all of their federal loans together, but depending on the types of debt you have, you may only choose to consolidate a portion of your loans.

The online application process should take about 30 minutes, and a co-signer isn’t required.

Refinancing vs. Consolidation: How to Decide Which Is Best

Not everyone can or should refinance their student loans, and not all borrowers are eligible for consolidation.

You may consider refinancing your student loans if:

  • You have excellent credit. If you have great credit, you’re on track to not only qualify for refinancing but also access some of the lowest interest rate available. If you can’t lower your interest rate or receive other tangible benefits with your new loan, it’s likely not worth refinancing.
  • You have private student loans. Because federal student loans come with added benefits and protections, refinancing these debts carries more risk. But if you have private student loans, you don’t have much to lose if you refinance—especially if you can reap interest savings in the process.
  • You’re not in a federal repayment program. Refinancing means you’ll lose federal protections, like more flexible forbearance, income-driven repayment plans or federal forgiveness programs. If you’re not utilizing these benefits (and won’t need them in the future), refinancing could be worthwhile.

You might consolidate your student loans if:

  • You only have federal student loans. Direct consolidation loans are only eligible for federal student loan borrowers.
  • You want to simplify payments. Because consolidation combines several federal loans into one, it can simplify the monthly payments you need to keep track of.
  • You want to lower monthly payments. Since direct consolidation loans have long repayment terms—up to 30 years—you can lower your monthly payment by consolidating. However, note that lowering your monthly payments typically results in more interest paid over the life of the loan.

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