Student Loan Refinancing Versus Consolidation: Which is Better?

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Posted on August 18, 2021

student loan refinance vs consolidation

While nobody has created a time machine that will allow you to go back and not borrow all that money for your degree, there are ways that you can make your student loan debt more manageable. Two of those ways are to either consolidate or refinance your student loans.

Not sure which one is right for you? Don’t worry, we’ll help you figure it out.

Private Student Loan Refinancing Explained

So, what is private student loan refinancing? The first thing you should know is that while it is done through a private loan, you can refinance both your federal and private student loans.

Essentially what happens when you refinance your student loans is that you take out a new loan that pays off your other loans. You can choose the loans you want to refinance. Typically, you would refinance your loans because you want a lower interest rate or you want to change your loan terms to give you longer or shorter terms.

Refinancing your student loans can potentially lower your monthly payment and allow you to save money on interest over the life of your loan. Some people also refinance to remove the co-signer from their loans because they’re now able to qualify for student loans on their own.

You might be wondering how difficult it is to qualify to refinance your loans. You may be pleasantly surprised to learn that if you’re working full-time and your credit score is between 650-680, chances are you may be able to refinance, according to NerdWallet. If your credit score is lower, you may still be able to refinance with a co-signer. The good news is that it doesn’t cost anything to check to see if you’re qualified.

Federal Student Loan Consolidation Explained

If you have federal student loans, you likely have multiple loans to pay each month. It can be time-consuming to keep track of all those separate loans and their separate interest rates. You might wonder why your student loan servicer can’t just put them all together into one big loan. In fact, they can — with a student loan consolidation.

Essentially, student loan consolidations allow you to bundle all your current federal student loans into one loan and extend your repayment term up to 30 years. This makes it easier to keep track of it, but it also allows you to qualify for the federal government’s income-based repayment programs. These programs limit the amount that you pay towards your debt each month from 10% to 20% of your salary and allow you to have your student loans forgiven after 20 to 25 years of on-time payments.

So how is your rate calculated when you consolidate your student loans? As a general rule, your new interest rate is weighted based on your old interest rates and rounded up to the nearest half percent. For example, if you had one loan for $10,000 and were charged 5% interest and another for $10,000 and charged 6%, your new interest rate would be 5.5%.

Depending on the loans you have, you should consider whether consolidating is a good idea. You can lose some benefits from consolidating, such as not having to pay interest during deferment. The good news is you get to choose the loans you consolidate, and you don’t have to consolidate all your loans.

Similarities and Differences

While both types of student loan interventions can give you just one loan to keep track of, each has very different outcomes.

While you can reduce your monthly payment and change the term length of your loan by signing up for income-based repayment options, you won’t be able to reduce your interest rate like you would if you refinanced your student loans. You also might not save money depending on your situation, as paying your loan over a longer period of time typically results in paying more interest over the life of your loan.

In comparison, you will likely save money and potentially reduce your monthly payment if you refinance your student loans with a private lender at a lower rate.

By refinancing with a private lender, you can bundle your private and federal loans together. The only drawback would be losing some of the federal protections. For instance, private lenders do not have forgiveness options or income-based repayment plans, although they sometimes have deferment options.

Another difference is that some private student loan refinance options have origination fees and pre-payment fees, but not all do. If you are going to refinance, be sure to look for options that don’t charge fees.

What’s Right for You

If you’re not sure when you’ll be able to repay your student loans, it might make sense to consolidate your federal loans and refinance your private loans. If you want to pay off all your student loans within a few years and you don’t expect to struggle to make payments, you might want to refinance all your debt with a private loan at a lower interest rate because it will ultimately be cheaper to do so.

If you’re interested in refinancing your student loans, click the link below to explore your options.


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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