Should I Consolidate or Refinance My Student Loans?

With each passing year, student loan debt continues to grow in scope and severity for American students. According to Student Loan Hero, the average student borrower who graduated in 2022 left school with $28,400 in debt. That’s a lot of money to owe for your education, particularly if you’re not entering a high-paying field.

college students

When students leave school with too much debt, they usually have only a few options to consider. They can either live frugally and pay off their debt the hard way, or they can explore income-driven repayment plans or loan forgiveness programs. A final option is consolidating or refinancing student debt, which can make sense in some situations.

Unfortunately, it’s easy to get confused when you start digging into what refinancing and consolidation really mean. In this piece, we’ll outline how both processes work, their pros and cons, and how to decide which is best for you.

Student Loan Consolidation vs. Student Loan Refinancing

Refinancing and consolidation can often mean the same thing. However, the types of loans you have can dictate the options available to you. For example, if you have federal student loans, you can choose between a Federal Direct Consolidation Loan or refinancing with a private company. Here are the main differences you’ll find when you start researching these two options.

Which student loans are eligible?

The federal government and the U.S. Department of Education oversee these loans. They are only available for individuals who want to refinance federal student loans such as Direct Loans, Direct PLUS loans, and FFEL loans.

On the other hand, if you have private student loans, you can only refinance or consolidate with another private lender. You aren’t eligible for federal loan consolidation because a third party is already handling your loans.

However, you can refinance federal student loans with a private lender if you’re willing to give up a few perks. The biggest downside to refinancing federal student loans with a private lender is that you lose out on government benefits if you refinance federal loans. This can mean no deferment or forbearance options and no income-driven repayment programs.

Refinancing with a private lender is a one-way street. Once you switch your federal student loans to private loans, there is no going back.

Student Loan Refinancing Helps You Save Money

You will not save money on interest when you consolidate federal student loans with a Direct Consolidation Loan. That’s because they use a weighted average of your current interest rates to come up with your new rate.

If Direct Consolidation Loans don’t lower your debt, you may wonder why anyone would want one. For the most part, consolidation allows people to merge several student loan payments into one new loan. This helps student loan borrowers simplify their lives. They can also help people extend their repayment timelines so they’re paying less each month.

On the other hand, with student loan refinancing, you may be able to save on interest if you can qualify for a new loan with a lower interest rate. For example, many private lenders offer rates as low as 3% to individuals who qualify.

Student Loan Repayment Options Vary

If you opt to use a Direct Consolidation Loan to bundle your current federal student loans, there are numerous repayment plans you can choose from. You can opt for a standard ten-year repayment plan, for example. You can also sign up for income-driven repayment plans, provided you meet income guidelines.

Private lenders that allow you to refinance also allow you to choose a repayment plan that fits your lifestyle and goals. Typically, you can repay private loans for up to twenty years. However, you can also choose a shorter repayment timeline.

So, not only can you potentially qualify for a lower interest rate with private loans, but extending your repayment timeline in this way can help you score a lower monthly payment, too.

Direct Loan Consolidation

While you may not save any money with consolidating, you could still benefit. Here are the main reasons consumers choose this option:

  • Simplify your life. If you are tired of juggling multiple loans and payments every month, a student loan consolidation can change your life. You’ll go from dealing with multiple monthly payments to just making one each month, and that can reduce your stress and make budgeting easier.
  • Switch to an income-driven repayment plan. These plans allow you to pay a percentage of your “discretionary income” for up to 25 years then have your loans forgiven in the end.

Private Student Loan Refinancing

With refinancing private student loans, your credit score matters a lot. In fact, many private student loan companies only accept individuals with good or excellent credit — or those who have a cosigner with excellent credit.

It may also be difficult to refinance your student loans if you don’t have a job lined up yet or haven’t made a few payments on your loans quite yet. In short, refinancing can be very difficult to qualify for.

With these details in mind, refinancing private student loans is usually best when:

  • You have great credit. If you have excellent credit that could help you secure a lower interest rate than you have now, student loan refinancing could be ideal.
  • You aren’t concerned about the perks you’ll lose when you refinance federal loans. Student loan refinancing is best for people who won’t take advantage of federal student loan protections such as forbearance, deferment, and income-driven repayment plans.
  • Change your repayment timeline. Student loan refinancing is also smart for people who want to change up their repayment timeline to pay their loans off faster or over a longer stretch of time.

Consolidation vs. Refinancing: How to Decide

Direct Consolidation Loans can help you simplify your life, but they won’t help you lower your debt. Refinancing, on the other hand, could help you save lots of money if your credit is excellent and you have a good job.

Make sure to look at how much you owe and how quickly you’ll pay it back. You also want to look at your current monthly payment before you decide to take drastic action with your loans. Refinancing and consolidation can be a smart move. However, it’s also possible you’re better off with the loans you already have.

Holly Johnson
Meet the author

Holly Johnson is a credit card expert, award-winning writer, and mother of two who is obsessed with frugality, budgeting, and travel.