While student loan debt has been a problem for American students for decades, the issue continues growing in scope and severity with each passing year. According to Student Loan Hero, the average student borrower who graduated in 2018 left school with $29,800 in debt. That’s a lot of money to owe for your education, particularly if you’re not entering a high-paying field.

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When students do leave school with too much debt, they usually have only a few options to consider. They can buckle down, 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.

Direct Loan Consolidation vs. Student Loan Refinancing

While refinancing and consolidation can often mean the same thing, the type of loans you have can dictate the options available to you. If you have federal student loans, for example, 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 loans are eligible?

These loans are overseen by the federal government and the U.S. Department of Education. As such, they are only available for individuals who want to refinance federal student loans such as Direct Loans, Direct PLUS loans, and FFEL loans.

If you have private student loans, on the other hand, you can only refinance or consolidate with another private lender. You aren’t eligible for federal loan consolidation because your loans are already being handled by a third party.

However, it’s important to note that 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, if you refinance federal loans, you lose out on government benefits. This can mean not having the option for deferment or forbearance and never being able to qualify for income-driven repayment programs in the future.

Also, note that 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

One Option Helps You Save Money

Another important detail to note is that, when you consolidate federal loans with a Direct Consolidation Loan, you will not save money on interest. That’s because they use a weighted average of your current interest rates to come up with your new rate.

You may be wondering why anyone would be interested in this type of loan if it doesn’t help lower their debt. For the most part, individuals consolidate this way because it lets them merge several student loan payments into a new loan with a single payment. This helps students simplify their lives. They can also help people extend their repayment timelines so they’re paying less each month.

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

Repayment Options Vary

If you opt to use a Direct Consolidation Loan to bundle your current federal student loans, there are several different 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. Generally speaking, you can repay private loans for up to twenty years, although you can also choose a shorter repayment timeline. 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.

Who Is Direct Loan Consolidation Good For?

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.

Who Is Private Student Loan Refinancing Good For?

With refinancing private student loans, your credit score matters a lot. In fact, many private student loan companies only accept individuals with good or great 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 if you 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 don’t care 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 great and you have a good job.

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