What's the Difference Between Student Loan Refinance and Student Loan Consolidation?

Student loans might be a trending political topic right now, but for borrowers they are part of daily life, and probably not the best part. If you took advantage of student loan packages that were available while you were in college and you graduated with debt, you might be overwhelmed by the thought of paying them off.

Even if the balance doesn't feel insurmountable, you could be sacked with multiple bills from multiple lenders with different due dates in different amounts. That's a lot to keep track of, especially when you thought you'd finally crossed math off your list after you passed pre-calculus.

Refinancing or consolidating your student loans might help tackle everything from huge balances to scattered payment due dates. However, even though these terms sometimes get used interchangeably, they have distinct meanings and different benefits and drawbacks. To find out whether one or the other would improve your individual situation, you first need to understand their definitions.

Defining Student Loan Consolidation and Student Loan Refinance

Student loan consolidation refers to combining — or consolidating — multiple federal student loans under one servicer so that you have one payment, according to Barry S. Coleman, vice president, counseling and education programs at the National Foundation for Credit Counseling.

Federal loans are those that were either issued directly by the Department of Education (which is how all federal student loans are made today) or by a private lender and guaranteed by the government, which is how federal student loans were made before 2010. (Names associated with student loans that are no longer distributed include Stafford, Perkins and FFEL.) PLUS loans are federal loans now provided to parents and graduate or professional students.

That's a lot to keep straight, but the important thing to know is that these are all federal student loans, so they can all be incorporated in a federal direct consolidation loan. In fact, most federal student loans — and only federal student loans — are eligible for consolidation. Today, consolidated loans come with a fixed interest rate determined by averaging the rate on the loans being included.

Unlike consolidating federal student loans, refinancing student loans requires a private lender. The overall idea is similar, though. You can combine your existing student loans into one private loan. And in this case, you can include both federal student loans and private student loans.

How Does Student Loan Consolidation Differ From Student Loan Refi?

Despite the similarities between student loan consolidation and student loan refinance, there are some distinct differences.

Only federal loans are eligible for student loan consolidation.
Both federal and private loans qualify for refinancing.
You can also opt for both methods if you want to consolidate your federal loans and refinance private loans.
Direct consolidation loan from the federal government offers a variety of repayment plans, and there is one to suit just about any budget.
Private lenders set the terms of a loan when it is made and are not as interested in the ups and downs of your financial situation.
Private lenders do not offer income-driven repayment options and will not "forgive" your loan balance simply because you have made many years of on-time payments.
A private student loan refinance can bring with it a lower interest rate because private loan offers are determined in part by your credit score.
The Department of Education does not base your student loan consolidation or interest rate on your credit score.

What Are the Pros and Cons of Each?

Both consolidation and refinance can simplify your life by allowing you to make one student loan payment each month. Because consolidation offers a variety of repayment options, including some that are income-based and have decades-long terms, combining federal loans with a direct consolidation can lower your monthly payment. You will also be able to get a fixed interest rate for the term of your loan. The drawback is that by extending the term of your loan, you will make more payments, accrue more interest and pay more in the long run.

Consolidating starts a new loan and also restarts the clock on repayment plans with a specific term. You could lose some benefits your older loans offered, or you might have to start over on working toward loan forgiveness.

Refinancing into a new private loan can offer benefits like a lower interest rate and a shorter term that will help you to pay off your new loan faster. And private loans also give you access to variable and fixed rates; some lenders might even offer cashback for refinancing, according to Student Loan Planner.

However, once you move federal student loans to a private lender, you cannot move them back. That means you lose all the protections federal student loans offer, like longer terms, income-driven repayment plans, and the possibility of deferment or forbearance if times get tough. Most importantly, you no longer have access to loan forgiveness.

Should I Consolidate or Refinance My Student Loans?

Whether you should consolidate or refinance your student loans depends on your situation and goals. Compare your total student loan balance with your current income to see whether you will be able to handle payments at a level to actually pay off your loans. In that case, with good credit, refinancing could work in your favor.

On the other hand, if your balance is staggering when compared to your current and potential income, a federal student loan consolidation might provide more realistic payment options and a final loan forgiveness.

Travis Hornsby, founder of Student Loan Planner, explains that if your debt is lower than $50,000, you can probably refinance and pay off the loans. However, borrowers with larger debt may benefit more from federal consolidation and income-driven repayment plans.

"We're seeing more and more people every year who owe more than $100,000," he says. In that case, a loan consolidation with income-based repayment and the possibility of loan forgiveness might be a better fit.

You can begin a direct consolidation loan application online for free. Your student loan servicer may or may not suggest it even if it is in your best interest, so do your own research to be sure it's the most beneficial repayment option.

If you want to refinance your student loans, research a lender and apply just like you would for other private loans. You can compare the offers from many lenders and get help choosing the right one from websites like Student Loan Planner or NerdWallet. And we promise you won't have revisit pre-calc to run some numbers. Student Loan Hero has plenty of calculators to do the calculations for you.

Lastly, remember that in addition to consolidating or refinancing multiple loans, you can consolidate or refinance a single loan to get better terms, a lower interest rate or earn a cashback benefit. And you can do this multiple times.

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