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

7 min read

Posted on June 15, 2022

couple enjoying date night not worried about their student loans

Whether you’re looking to lower your monthly student loan payment or reduce the number of loans to keep track of, changing your repayment plan through consolidation or refinancing may be the answer to your problems.

This article covers what it means to consolidate or refinance your student loans, the difference between loan consolidation and loan refinancing and how to know which option is best for you.

What Is Student Loan Refinancing?

Student loan refinancing is the repayment of one or more loans with a new loan from a private lender. Through refinancing, you may eliminate the complexity of juggling loans from multiple lenders and may get a new, lower interest rate and different loan terms.

Both private and federal student loans are eligible for refinancing. However, it’s worth noting that refinancing federal student loans with a private lender will result in the loss of eligibility for federal debt forgiveness or income-driven repayment plans).

If you decide to refinance for interest rates, keep in mind that you are not guaranteed a lower rate. To get a lower rate, you must have a solid credit history or bring in a cosigner with a good credit score. The cosigner would be liable in the event you fail to pay back your loan.

Benefits of Student Loan Refinancing

The benefits of student loan refinancing may include reduced complexity, lower monthly payments or shorter or longer repayment terms that fit your current financial situation.

Reduced Complexity

When you refinance your student loans, you may reduce not only the number of payments you make each month, but also the amount of log-in details and pay-off dates to keep track of.

Lower Monthly Payments

If you refinance your student loans and qualify for lower interest rates, and your repayment term either stays the same or increases, you may enjoy lower monthly student loan payments. Likewise, if you refinance your student loans to a longer repayment term with the same or lower interest rate, your monthly student loan payment may be lower.

Repayment Term

The standard student loan repayment term is 10 years. Depending on your financial situation, refinancing may allow for shorter or longer repayment terms.

The benefit of a shorter repayment term is that you may pay less in interest, saving you money long-term, whereas the benefit of longer repayment term is lower monthly payment, saving you money in the short term.

What Is Student Loan Consolidation?

Student loan consolidation is the combination of multiple federal student loans into a single federal loan. Private student loans cannot be consolidated with this type of federal loan product.

The list of Federal student loans that may be consolidated is extensive and includes:

  • Subsidized, Unsubsidized and Nonsubsidized Federal Stafford Loans.
  • Subsidized and Unsubsidized Direct Loans.
  • Direct and Federal Family Education Loan PLUS Loans.
  • Supplemental Loans for Students.
  • Federal Perkins Loans.
  • Nursing Student or Faculty Loans.
  • Health Student or Educator Loans.
  • Loans for Disadvantaged Students.
  • Direct and Defense National Student Loans.
  • Parent Loans.
  • Guaranteed Loans.
  • Federal Insured Loans.
  • Auxiliary Loans.
  • Certain FFEL and Direct Consolidation Loans.

Benefits of Student Loan Consolidation

The benefits of student loan consolidation may include a lower monthly payment, new interest rate and eligibility for income-based repayment plans.

Repayment Term

Once consolidated, you may also elect to extend your repayment term up to 30 years well beyond the standard 10 year term, saving you money today thanks to lower monthly payments. However, keep in mind that extending the term of your loan may result in more interest expense over the life of the loan, and thus should be considered carefully.

New Interest Rate

Federal student loan consolidation is unlikely to result in a lower interest rate. Rather, the fixed interest rate for a Direct Consolidation Loan is the weighted average of the interest rates of the consolidated loans, rounded up to the nearest one-eighth of a percent.

So, consolidating your student loans may actually increase your interest rate, but at a fixed rate, making it easier to budget for your monthly payments.

Income-Based Repayment Plans

A benefit of consolidating federal student loans rather than refinancing with a private lender is that remaining with a federal lender allows you to qualify for the federal government’s income-based repayment programs. These programs generally limit the amount that you pay towards your debt each month from 10% to 20% of your salary and may allow you to have your student loans forgiven after 20 to 25 years of on-time payments.

Key Differences Between Student Loan Consolidation and Refinancing

The following table breaks down the difference between student loan consolidation and student loan refinancing.

Student Loan Consolidation

Student Loan Refinancing

Eligible Loans
Federal student loans
Private and federal student loans
Lender Type
Only available through the federal government
Available through the financial institutions (known as private lenders), such as credit unions and banks
Interest Rate
Based on the the weighted average of consolidated loans, rounded up to the nearest 1/8th of 1% (for Federal Direct Consolidation Loans only)
Note that interest accrued before consolidation is added to the loan amount (i.e., principal)
Based on the creditworthiness of yourself and/or the cosigner
Creditworthiness is based on credit scores, credit history, debt-to-income ratio, and earned income, among others
Change From Variable Interest Rate to Fixed Rate
Yes, with Federal Direct Consolidation Loans, variable interest rates on existing loans could change to fixed rates, providing stable monthly payments
Yes, with refinance, variable interest rates on existing loans could change to fixed rates, providing stable monthly payments
Income-Driven Repayment Plans
Yes, you may adjust repayment terms based on income, though credit for existing payments made may be wiped out on a Federal Direct Loan if you consolidate
No, income-based repayment plans are federal programs and do not continue upon refinancing, though some private lenders offer economic hardship programs
Loan Forgiveness
Yes, loan forgiveness is available to eligible borrowers
Forgiveness may be granted under a number of federal programs, including Public Service Loan Forgiveness, Teach Loan Forgiveness and Closed School Discharge, to name a few
No, loan forgiveness is a federal program and does not continue upon refinancing
Monthly Student Loan Payments
1, unless you choose not to consolidate all loans
1, unless you choose not to refinance all loans
Longer Repayment Loan Terms
Yes, available under extended repayment plans, if eligible
Yes, depending on the lending institution

The Biggest Difference Between Student Loan Consolidation and Student Loan Refinancing

Finally, the biggest difference between student loan consolidation and student loan refinancing is the type of loan (federal or private). We provide a summary of each type below to help you understand your options.

Private Student Loans

Private lenders offer loans to students for the purpose of paying for higher education. There are two private lending options for simplifying your existing portfolio of student loans:

  • Refinancing with a private lender may seem the same as student loan consolidation, but it is different in that refinancing is the pay-off of existing loans (both federal and private) and the issuance of a new private loan with new loan terms.
  • Consolidating private loans is less common and requires applying with a lender. As consolidated private loans typically come with new interest rates and terms, many view private loan consolidation as refinancing.

In both cases, private loans take into account your financial position and credit score.

Federal Student Loans

Federal student loans are available through the federal government.

Standard federal student loan terms are pre-determined and are not adjusted for individual borrowers. As the government tends to update interest rates on an annual basis, loans taken out in different years likely have different interest rates. When consolidating loans with multiple rates, Federal Student Loan Consolidation applies a specific formula, using the weighted average interest of all consolidated loans rounded up to the nearest one-eighth of one percent. The U.S. Department of Education provides a detailed explanation of the calculation to help you estimate what your rate may be before you decide if consolidation makes sense for you.

Should You Refinance or Consolidate Your Student Loans?

When deciding if applying for student loan refinancing or applying for student loan consolidation is best for you, there are several factors to consider, including:

  • What types of student loans do you have now?
  • What is your goal (lower payments, less complexity in managing loans, both?)
  • Do you currently benefit from federal government service or income programs?
  • What is your credit score?
  • Are your finances stable?

When It’s Better to Refinance Your Loans

After gathering these facts, consider the following reasons why refinancing student loan debt may be better than student loan consolidation.

  1. You have private loans. If you only have private loans or a mix of private and federal student loans, you will not be eligible for federal loan consolidation on all or any of your loans as federal loan consolidation is only available on federal loans. Refinancing with a private lender could be an option for either private loans only or a mix of private and federal loans. You do lose all federal loan benefits when you refinance federal loans with a private lender.
  2. Your main goal is lower monthly payments. If you’re looking for lower monthly payments and have a good credit history, refinancing may result in lower interest rates than under federal student loan consolidation. However, for your monthly payments to decrease, in addition to a lower interest rate your repayment term would need to stay the same or be extended (a lower interest and shorter repayment period may result in no change or higher monthly payments).
  3. You struggle to budget with variable rate loans. Refinancing offers the opportunity to change to a fixed rate loan so you have a consistent monthly payment.
  4. You don’t use federal repayment assistance programs. Unless you participate in income-driven repayment plans or will benefit from the public service loan forgiveness program, student loan refinancing could potentially result in lower monthly student loan payments and/or a lower interest rate than a Federal Direct Consolidation Loan.

MORE: How Does Student Loan Refinancing Work?

When It’s Better to Consolidate Your Loans

Now review the following reasons why consolidating student loan debt may be better than refinancing.

  1. You only have federal loans. If you have only federal loans, it may make sense to consolidate into a single Federal Direct Consolidation Loan and take advantage of income-driven repayment plans if you still want lower payments.
  2. Your main goal is simplicity. If the volume of monthly student loan payments bothers you more than the amount of student loan payments, federal consolidation could be easy solutions to this problem.
  3. You work in public service. Employees of nonprofits and the government may qualify for the student loan forgiveness program, Public Service Loan Forgiveness (aka PSLF), which is not available after refinancing with a private lender. Thus, if you anticipate staying in public service for the foreseeable future, and your job qualifies for PSLF, it may be prudent to go with federal consolidation.

Find a Student Loan Repayment Plan That Works for You

Whether you have private or federal loans, you could benefit from student loan consolidation or student loan refinancing.

There is no one size fits all solution for student loan repayment plans. And although loan refinancing may be associated with lower payments while student loan consolidation may be associated with simplicity, both are viable based on your unique goals, financial status and existing loans.


The information provided in this blog post is not intended to provide legal, financial or tax advice. We recommend consulting with a financial adviser before making a major financial decision.

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