Student Loans: Consolidate or Refinance?

You’ve taken out loans for college, now that you’re paying them back, that’s that. Right? Not entirely, when you start to pay back your loans and gain your footing in life, there are options you have with what to do with those loans. You can consolidate or refinance. But, what’s the difference? This is kind of a tricky question, but I’ll keep it simple.

Consolidation or more specifically the federal Direct Consolidation Loan can only be done with federal loans. This means taking your multiple loans and combining them into one loan through the federal government. You get a single bill that greatly simplifies your life; however, you don’t get a lower rate.  The rate of the consolidated loan is basically the weighted average of individual loans that get consolidated.

Refinancing can be done with both federal and private loans. You get some of the same benefit as Consolidation like combining multiple loans into a single loan and simplifying bills. In addition, by refinancing, you may also be able to lower your interest rate or monthly payment because refinancing will be a new loan and based on your current credit profile. The rates for refinancing have fallen in recent times with falling interest rates in general and many borrowers are able to take advantage of lowering their debt burden with refinancing.  However, most refinancing do not offer some of the benefits offered by federal loans such as income-driven payment and public service loan forgiveness. 

Federal Direct Consolidation Loan

Consolidating your student loans will combine all your monthly payments into one. Be cautious though, the increase in the term of your loan means that you will end up paying more overall.  If you’ve taken out federal student loans, once you’ve graduated, you can apply for the Direct Consolidation Loan. There are advantages to consolidation like simplified single bill, switching from variable rate loan to fixed rate loan, potentially lower monthly payment, however you’ll want to be sure that the benefits of consolidation outweigh potential benefits of continuing with the existing loan.


  • When you consolidate, you will usually end up with a longer time to pay off your loan, which also means you’ll be paying more interest than if you didn’t consolidate.
  • Unfortunately, that outstanding interest won’t disappear, it will be added to the principal of the consolidation loan. So, your interest could be on a higher balance than before consolidation.
  • After consolidation, you can lose benefits like interest rate discounts, principal rebates, and cancellation benefits that are related to the existing loans.
  • You may also lose any credit for payments made for income driven repayment plan forgiveness and public service loan forgiveness for your existing loans after consolidation.

According to the Federal Student Aid Office, “If consolidation would cause you to lose the benefits associated with some of your current loans and you are working toward earning those benefits, you should not include those loans in your new Direct Consolidation Loan. When you apply for a Direct Consolidation Loan, you don’t have to consolidate all of your eligible loans.”

Student Loan Refinancing

Both federal and private student loans can be refinanced through private lenders.  There are major benefits to refinancing, but you’ll want to make sure you’re in the best position to do so.  Refinancing is usually available to borrowers who are employed and have a good credit score. Refinancing can lower your interest rate and save thousands in interest payments, thus helping you get out of debt faster.  Refinancing can also lower your monthly payments if you go for the variable rate loan or choose longer term for refinance, thus making your monthly budget more manageable.  Finally, refinancing also allows you to combine your various loans into a single loan and simplify your bills.

There are also things to be wary of when considering refinancing. In an article published by the Wall Street Journal, Cody Hounanian, program director at Student Debt Crisis, notes,  “A major downside to refinancing federal loans with a private lender is that borrowers lose the consumer protection and repayment programs that federal loans offer, including income-driven repayment and loan forgiveness.”  However, don’t have a knee-jerk reaction, especially if you are not using these programs.  Potential savings from a reduced rate can run into thousands and can help you get out of debt faster.

The good news is that you can check how much you can lower interest or lower your monthly payments for free at online marketplaces such as Lend-Grow. Sites such as Lend-Grow connect borrowers with network of lenders offering student loan refinancing.

What’s right for you:

  • Goal: What is most important to you – simply billing, getting out of debt faster, or lowering your monthly payment to something manageable? If it is just simplifying billing Consolidation will do the job.  However, if you want to take advantage of lower rates and get out of debt faster, consider exploring the refinance option. If you want to lower your monthly payments, both options can help.  However, while consolidation will lower monthly payments by just increasing the loan term, refinancing can both lower your rate and allow you to choose a longer term so you may be able to get an even lower monthly payment than consolidation.
  • Loan Type: Determine whether you have a federal or a private loan. If your loan is federal, you’ll have to make the decision to consolidate through the federal government, or refinance through a private lender. If you want to combine both federal and private loans into a single loan or if you want to reduce your rate or payment for private loans, refinancing would be the better option.
  • Credit: If you have good or excellent credit, you’ll likely be favored by refinance lenders to get the best possible rates.
  • Benefits: Are you using or expect to use some of the benefits offered by Federal loans such as income driven repayment or public service loan forgiveness? If you are not using these programs, at least check the lower rates or lower payment you can get through refinancing. Getting out of debt faster and managing your budget will give you true freedom and independence to achieve your life personal goals.

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