Refinancing vs Consolidating Your Student Loans: How to Choose

Renee Layberry
May 4, 2021

You've earned your degree, and found a great job. Life in the real world has started!   Along with these important milestones comes another one that you might not be looking forward to: paying off your student loans.   If your monthly payments are taking too much of your net income or if you want to streamline the process and save money, you have a couple of options. Student loan consolidation and student loan refinancing might often get lumped together as one method of loan management, but they have distinct differences. Understanding those differences can help you find the right approach for managing your student loans.   Read on to better understand if you should be refinancing or consolidating your student loans.  

Student loan refinancing

Student loan refinancing with a private lender compiles all your loans into one if you have multiple loans. It is also an opportunity to lower your interest rate with a new lender.   The reason for refinancing is to save money. For example, since most college students don't have a steady income or solid credit history, private student loans often have high fixed interest rates or variable interest rates.  Those rates can result in significantly higher monthly payments, which can take a bite out of your budget. Refinancing to a lower fixed interest rate can offer some benefits.   Photo by 金 运

Advantages of student loan refinancing

The benefits of refinancing your student loans include:
  • You may be able to refinance at a lower interest rate, provided that you have excellent credit and a reliable income. A lower rate can result in a lower monthly payment.
  • You can combine multiple private student loans into one, which means just one payment a month.
  • You can get rid of a variable interest rate that changes with the market. Loans with variable interest rates are harder to budget for.

Disadvantages of student loan refinancing

There are disadvantages you should be aware of when you're considering refinancing your student loan. These are:
  • Low interest rates are reserved for only the most appealing borrowers. If you don't have an extremely good credit score, refinancing probably won't reduce your interest rate.
  • Sometimes the monthly payment goes down because the loan repayment is extended, not because the interest rate is lower. So, review terms carefully for refinancing.
  • Refinancing requires a hard credit inquiry on your credit report, so you may not want to do it if you're planning on buying a car or home soon. Getting pre-qualified before you apply for the new loan will reduce those hard credit checks, and shouldn't impact your score.

Student loan consolidation

Student loan consolidation involves combining all of your debts into one new loan. When you have federal student loans, you can consolidate them either through the U.S. Department of Education or with a private lender. Most federal student loans can be consolidated, including popular ones like Stafford loans, Perkins loans, and direct and indirect unsubsidized loans.   Consolidation can usually occur at any point after you graduate. You may choose to consolidate right after graduation, or you may choose to wait – the only stipulation is that you cannot be a full-time student.  

Requirements for consolidating federal student loans

Most federal student loans are eligible for consolidation, but you have to make sure your payments are in order so that you can pursue this option.    To start the process, you should be either actively repaying your loan or in the grace period, which is the period right after you graduate when you aren't required to make payments. If you have missed payments and are in default, you'll need to get on track before moving forward with the consolidation. Talk to your lender about a repayment arrangement before consolidating.   Photo by Joshua Hoehne

Advantages of student loan consolidation

The biggest advantage of consolidating your student loans is that you only have one payment to make every month. You won't have to manage different loan payments due on different days, which can make budgeting more challenging.   There are other advantages too. These include:
  • A fixed interest rate. If you're currently struggling with a variable interest rate, consolidation allows you to move all your loans to a fixed rate.
  • A reduced monthly payment (in some cases). However, this monthly payment may be deceiving because, while you're paying less per month, the life of your loan has been extended, which means you're paying more interest in the long run.

Disadvantages of student loan consolidation

The main disadvantage of consolidating your student loans is that it typically results in a longer loan term. That means you'll have more time – and pay more interest – to pay it off.   Other disadvantages include:
  • You may lose the benefits associated with your current loans. For example, if you're paying your current loans under an income-driven repayment plan, consolidating them will cause you to lose credit for any payments made toward income-driven repayment plan forgiveness. It might be better to keep any benefits-driven loans out of your consolidation plan to ensure you don't lose the benefits.
  • Any outstanding interest on your loans will be lumped into your principal balance on the consolidated loan. In effect, you'll be paying interest on that interest.

How to choose the right option for you

When selecting between student loan consolidation and student loan refinancing, consider these factors:
  • Type of loan. Consolidation is more common for federal student loans, while refinancing is typically reserved for private student loans.
  • Ultimate goal. If you want to make one monthly loan payment rather than several, you consolidate. If you want to lower your interest rate and possibly your monthly payment, you refinance.
  • Repayment plans. Choose consolidation if you want to take advantage of federal student loan repayment plans.
  Let your decision to refinance or consolidate your student loans be guided by your type of student loan. Then, evaluate whether refinancing vs consolidating your loan can help you achieve your goals, whether you're aiming for a lower interest rate, fewer bills, or a lower monthly payment.