Student Loan Consolidation vs. Refinancing: What’s the Difference?

Federal student loan consolidation and refinancing allow you to combine multiple debts into one, but they operate differently. 

Student loan consolidation is a process that merges several federal loans into a single federal loan. By comparison, refinancing means swapping out one or more federal or private student loans with a new private student loan.

Understanding the pros and cons of student loan debt consolidation vs. refinancing can help you determine which strategy might be best for you.

Student loan consolidation vs. refinancing 

Below is a table highlighting the crucial differences between student loan consolidation and refinancing. Keep reading for more about both.

	Consolidate	Refinance
Need	Combine multiple federal loans & retain federal benefits	Lower rate on a private or federal student loan
Types of loans	Federal	Federal & private
Offered through	Federal government (U.S. Department of Education)	Private financial institutions (credit unions, banks, & online lenders)
Eligibility based on	Must have an eligible federal loan in a grace or repayment status	Credit score, income, & outstanding debt
Interest rate calculation	Weighted average of all of loans you’re consolidating rounded up to nearest 0.125%	Lender determines rate based on your financial situation
Federal loan benefits?	✅	❌
Main benefit	Keep access to federal loan benefits	Can lower your rate and monthly payment
Main drawback	Doesn’t lower your overall rate	Loss of federal loan benefits

Student loan consolidation

How it works

To consolidate federal loans, you must apply for a Direct Consolidation Loan online through the StudentAid website or by mail. You’ll need to provide several pieces of information to complete the application, including your FSA ID and details about you, your finances, and your loans.

Eligibility

• Eligible loans: Most federal loans, including Direct PLUS Loans, Direct Unsubsidized Loans, Direct Subsidized Loans, and Federal Perkins Loans, are eligible for consolidation.
• Qualification requirements: You must have an eligible federal loan in good standing. If you have a student loan in default, you must make at least three successive payments before qualifying.

The following image shows how a borrower can consolidate several federal loans with a Direct Consolidation Loan:

Student loan refinancing

How it works

When you refinance your student loans, you take out a new loan with a private lender to pay off your federal or private student debt.

• Eligibility
  • Eligible loans: You can refinance private and federal student loans.
  • Qualification requirements: Eligibility requirements vary by lender. But when you apply, most lenders consider your credit score, income, and how much debt you have. You can also add a cosigner to your application if you need help meeting the eligibility requirements.

Here’s an example of how a borrower can refinance three private student loans into a new private loan:

Pros and cons of consolidating vs. refinancing student loans 

Before you choose federal student loan consolidation or refinancing, consider the advantages and disadvantages of both options. 

The main advantage of consolidating if you have federal loans is maintaining access to federal benefits, such as student loan forgiveness programs. However, unlike refinancing, federal student loan consolidation doesn’t lower your overall rate.

Consolidate	Refinance
✅ Keep access to federal benefits  ✅ Lower monthly payments ✅ No credit check required ✅ Can make debt repayment easier	✅ Potentially lower rate ✅ Lower monthly payments ✅ Remove a cosigner ✅ Can make repayment easier
❗ Doesn’t lower your overall interest rate ❗ You may pay more interest ❗ Unpaid interest ❗ Lose credit for payments made	❗ Lose access to federal benefits ❗ Good credit required ❗ Credit check required ❗ You may not qualify for a lower rate

Here’s more about the advantages of consolidation:

• Keep access to federal benefits: Consolidating allows you to maintain access to federal benefits most private lenders don’t offer, such as income-driven repayment plans and student loan forgiveness programs.
• Lower monthly payments: You can choose a longer repayment term to lower your monthly payments.
• No credit check required: Unlike refinancing, the federal government doesn’t perform a credit check when you consolidate your loan.
• Can make debt repayment easier: Instead of keeping track of multiple payments, you’ll now only have one payment.

Here’s more detail about the advantages of refinancing:

• Potentially lower interest rate: You might qualify for a lower annual percentage rate depending on your credit score and other factors.
• Lower monthly payments: You can lower your monthly payments by extending your loan term or qualifying for a lower rate.
• Remove a cosigner: Refinancing a loan can help you release a cosigner from their responsibility to repay the loan.
• Can make debt repayment easier: Instead of keeping track of multiple payments, you’ll now only have one payment.

Here’s more about the downsides of consolidation:

• Doesn’t lower your overall interest rate: Your new interest rate is a weighted average of your consolidated federal loans, rounded to the nearest 0.125%.
• You may pay more interest: If you extend your loan term, you’ll pay more interest over the life of the loan.
• Unpaid interest: Any unpaid interest on your loans is added to the principal balance when you consolidate federal loans.
• Lose credit for payments made: You typically lose credit for payments made toward loan forgiveness, but payments still count for those who apply for Direct Loan consolidation before April 30, 2024.

Here’s more about the potential downsides of refinancing:

• Lose access to federal benefits: When you refinance a federal loan, you’ll lose access to federal benefits.
• Good credit required: Many lenders require good credit to qualify for refinancing.
• Credit check required: When you apply, most lenders perform a hard credit pull to review your credit history, which can lower your credit score by a few points.
• You may not qualify for a lower rate: Even if your financial situation has improved since taking out the original loan, there’s no guarantee you’ll qualify for a lower rate.

Consolidation vs. refinancing: Our expert weighs in

Erin Kinkade

CFP®

Student loan consolidation does not necessarily lower the interest rate but could allow federal loans to maintain their benefits (and simplify to one payment versus multiple). So if your overarching goal is to reduce the interest rate, refinancing is the way to go. Just be sure you understand what benefits you would give up. Refinancing can be consolidation and interest rate reduction. However, you’ll forfeit their unique benefits if the loans are federal. If your overall goal is to maintain the federal student loan benefits and simplify your life by making one payment rather than multiple, consolidation is best. Just understand that this is not a reduction in the interest rate or monthly payment.

Consolidate or refinance: Which should you do?

Whether consolidating or refinancing is best for you depends on your unique financial situation. The table below highlights when one option may be a better fit and vice versa. Keep reading for more about each scenario.

Consider consolidating if…	Consider refinancing if…
You want to keep access to federal benefits	You don’t plan to use your federal loan benefits
You want to gain access to federal benefits	You have private student loans
You can’t qualify for a lower rate	You have good credit and a stable income

Here’s more about when to consider consolidating:

• You want to keep access to federal benefits: Federal student loan consolidation is the only way to maintain access to income-driven repayment plans and student loan forgiveness programs.
• You want to gain access to federal benefits: If you have a Federal Family Education Loan, you may not qualify for certain student loan forgiveness programs. However, you can become eligible for those programs if you consolidate into a Direct Consolidation Loan.
• You can’t qualify for a lower rate: If you aren’t eligible for a lower rate refinancing your federal loans, it might make sense to consolidate instead.

Here are more details about when it might make sense to consider refinancing:

• You don’t plan to use federal loan benefits: If you don’t mind losing access to federal benefits, refinancing your federal student loans might make sense if you can save money.
• You have private student loans: Refinancing is your only option if you have private loans because federal loan consolidation is only an option for federal loans.
• You have good credit and a solid income: If you have stellar credit and a steady income, you may have a good chance of qualifying for a new private loan with a lower rate.