Student loan refinance vs. consolidation: What’s the difference?

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Student loan refinance vs. consolidation: What’s the difference?

Looking to simplify your student loan payments or secure a lower interest rate? Student loan consolidation or refinancing may provide the solution.  (iStock)

If you have multiple student loans, you may be looking for an easier way to manage your monthly payments, get a better interest rate or change your repayment term.

Fortunately, you have options, namely student loan consolidation or refinancing. But if you’re like many people, you may be wondering: What’s the difference between refinancing vs. consolidation? And which option provides the best solution for you?

While these terms are often used interchangeably, for student loans refinancing and consolidation are different. Let’s set the record straight by reviewing these two loan strategies, their benefits and drawbacks and when it makes sense to consolidate or refinance your student loans.

With Credible, you can compare student loan refinance rates from various lenders in minutes.

What is student loan consolidation?

Student loan consolidation specifically refers to the consolidation of federal student loans through a Direct Consolidation Loan. 

The purpose of a Direct Consolidation Loan is to consolidate multiple federal student loans into one loan, leaving you with one loan balance and one monthly payment. Only federal loans — not private loans — may be included in a student loan consolidation. 

Since the application process doesn’t include a credit check, you don’t need good credit to qualify. But you won’t be able to secure a lower interest rate with a student loan consolidation — your new interest rate will be the weighted average of all your existing federal loans.

Student loan consolidation benefits

  • Having a single loan payment rather than multiple payments ​​may make your student loan debt easier to manage.
  • You can lower your monthly payment by extending your loan repayment term — up to 30 years. But keep in mind that extending a repayment term means you’ll likely pay more in interest over the life of the loan.
  • Consolidating your government loans can allow you to keep the benefits that come with federal loans, such as income-driven repayment options and forgiveness programs.
  • If you’re unhappy with your current federal student loan servicer, you may be able to switch when you consolidate into a Direct Consolidation Loan.

Student loan consolidation drawbacks

  • Because the principal balance on your new consolidation loan will include any outstanding interest on your original loans, the interest that accrues on your new loan may be higher than if you never consolidated your loans.
  • If you extend the loan repayment term, you’ll make more payments and pay more in interest over time.
  • If you’re in an income-driven repayment plan or the Public Service Loan Forgiveness (PSLF) program, you may lose any payment credits you’ve earned if you consolidate your federal loans.

What is student loan refinancing?

Private student loan refinancing involves using a private lender to combine multiple student loans — either federal or private student loans, or a combination of both — into one larger loan with a single monthly payment. 

Student loan refinancing benefits

  • With a refinance, you can typically get a lower interest rate than you were paying on your original student loans.
  • You may obtain a lower monthly payment by extending your repayment term.
  • You may be able to release a cosigner from your original student loans.

Student loan refinancing drawbacks

If you’re considering refinancing your federal student loans with a private student loan, make sure you understand the benefits you’re forfeiting and carefully weigh the benefits with the potential downsides. If you have stable employment, a strong financial profile and if you’re unlikely to qualify for forgiveness options, it may be worthwhile to consider lowering your interest rate through private student loan refinancing.

Credible lets you easily compare student loan refinance rates without affecting your credit score.

Student loan refinance vs. consolidation: What are the requirements?

Generally, it’s easier to qualify for a federal consolidation since there’s no credit check, and you don’t need a cosigner. If you’re considering private student loan refinancing, you’ll typically need consistent income and good credit to qualify.

Federal student loan consolidation requirements

To qualify for a federal student loan consolidation through a Direct Consolidation Loan, you must meet the following requirements:

  • You can only include federal student loans in a Direct Consolidation Loan.
  • You must be a graduate, a student below half-time enrollment or no longer attending school.
  • Your loans must be in repayment or a grace period.
  • You may only consolidate an existing consolidation loan if you include at least one additional eligible loan in the new consolidation.
  • You can only consolidate a defaulted loan if you must make repayment arrangements before you apply for consolidation.
  • If a defaulted loan brought a court order or wage garnishment against you, you won’t be able to consolidate the loan until the judgment is terminated or the wage garnishment is dropped.

Private student loan refinance requirements

The requirements for refinancing private student loans are generally the same as they are for obtaining other types of credit and loans. You typically must have a strong credit history and stable income to refinance your loans at a lower rate. You’ll likely need a credit score of at least 670 to qualify. Of course, the higher your credit scores are, the more likely you’ll receive offers for lower interest rates.

If you don’t have good credit, you might consider applying for student loan refinancing with a cosigner with excellent credit. Another option is to work to improve your credit before applying for a new loan.

When consolidating your student loans makes sense

Depending on your goals for managing your federal student loans, you may benefit from a student loan consolidation. It may make sense to consolidate your federal student loans if you’re looking to:

When refinancing your student loans makes sense

While the interest rate you receive can vary depending on the lender, the benefits of refinancing your student loan are generally the same no matter which lender you choose. You may want to refinance your student loans if you’re seeking:

  • Loan flexibility — You can save on interest you’ll pay on your loans by refinancing them into a shorter repayment period. Conversely, you can lower your monthly payment by extending the repayment period, although doing so means you’ll pay more interest over the life of your loan.
  • A lower interest rate — If your income and credit are better than when you initially applied for your original loans, chances are you may qualify for a better interest rate.
  • Debt transfer — If you’re a parent who took out student loans to help pay for your child’s higher education, you can transfer the debt into their name when you refinance the student loans.

As mentioned before, refinancing your student loans may deliver the benefits you’re seeking, but you must understand the federal protections and benefits — such as access to loan repayment assistance and student loan forgiveness programs — you won’t have with a private loan.

If a student loan refinance is right for you, you can use Credible to compare student loan refinance rates from various lenders.

Other ways to manage your monthly student loan payments

If you’re looking for an easier way to manage your student loan debt, you may have other options besides consolidation or refinancing: