Student loan refinance vs. consolidation: What’s the difference?

Looking to simplify your student loan payments or secure a lower interest rate? Student loan consolidation or refinancing may provide the solution.  (iStock)

If you have multiple student loans, you may be looking for an easier way to manage your monthly payments, get a better interest rate or change your repayment term.

Fortunately, you have options, namely student loan consolidation or refinancing. But if you’re like many people, you may be wondering: What’s the difference between refinancing vs. consolidation? And which option provides the best solution for you?

While these terms are often used interchangeably, for student loans refinancing and consolidation are different. Let’s set the record straight by reviewing these two loan strategies, their benefits and drawbacks and when it makes sense to consolidate or refinance your student loans.

With Credible, you can compare student loan refinance rates from various lenders in minutes.

• What is student loan consolidation?
• What is student loan refinancing?
• Student loan refinance vs. consolidation: What are the requirements?
• When consolidating your student loans makes sense
• When refinancing your student loans makes sense
• Other ways to manage your monthly student loan payments

What is student loan consolidation?

Student loan consolidation specifically refers to the consolidation of federal student loans through a Direct Consolidation Loan. 

The purpose of a Direct Consolidation Loan is to consolidate multiple federal student loans into one loan, leaving you with one loan balance and one monthly payment. Only federal loans — not private loans — may be included in a student loan consolidation. 

Since the application process doesn’t include a credit check, you don’t need good credit to qualify. But you won’t be able to secure a lower interest rate with a student loan consolidation — your new interest rate will be the weighted average of all your existing federal loans.

Student loan consolidation benefits

• Having a single loan payment rather than multiple payments ​​may make your student loan debt easier to manage.
• You can lower your monthly payment by extending your loan repayment term — up to 30 years. But keep in mind that extending a repayment term means you’ll likely pay more in interest over the life of the loan.
• Consolidating your government loans can allow you to keep the benefits that come with federal loans, such as income-driven repayment options and forgiveness programs.
• If you’re unhappy with your current federal student loan servicer, you may be able to switch when you consolidate into a Direct Consolidation Loan.

Student loan consolidation drawbacks

• Because the principal balance on your new consolidation loan will include any outstanding interest on your original loans, the interest that accrues on your new loan may be higher than if you never consolidated your loans.
• If you extend the loan repayment term, you’ll make more payments and pay more in interest over time.
• If you’re in an income-driven repayment plan or the Public Service Loan Forgiveness (PSLF) program, you may lose any payment credits you’ve earned if you consolidate your federal loans.

What is student loan refinancing?

Private student loan refinancing involves using a private lender to combine multiple student loans — either federal or private student loans, or a combination of both — into one larger loan with a single monthly payment. 

Student loan refinancing benefits

• With a refinance, you can typically get a lower interest rate than you were paying on your original student loans.
• You may obtain a lower monthly payment by extending your repayment term.
• You may be able to release a cosigner from your original student loans.

Student loan refinancing drawbacks

• If you refinance federal loans into a private loan, you’ll forfeit the protections and benefits that come with federal student loans, including access to income-driven repayment (IDR) plans and student loan forgiveness programs.
• If you refinance while serving in the military, you could become ineligible to receive an interest reduction under the Servicemembers Civil Relief Act (SCRA) for any federal and student loans you acquired before your enlistment.
• If you include federal loans in your refinance, you’ll lose deferment and forbearance options. That means you won’t be able to defer payments — without interest accrual — on subsidized federal loans for up to three years if you’re in a tight spot.
• If you refinance your repayment term to get a lower payment, you’ll increase your total interest costs and extend the time when you’re under the burden of student loan debt, which may stand in the way of other financial goals.

If you’re considering refinancing your federal student loans with a private student loan, make sure you understand the benefits you’re forfeiting and carefully weigh the benefits with the potential downsides. If you have stable employment, a strong financial profile and if you’re unlikely to qualify for forgiveness options, it may be worthwhile to consider lowering your interest rate through private student loan refinancing.

Credible lets you easily compare student loan refinance rates without affecting your credit score.

Student loan refinance vs. consolidation: What are the requirements?

Generally, it’s easier to qualify for a federal consolidation since there’s no credit check, and you don’t need a cosigner. If you’re considering private student loan refinancing, you’ll typically need consistent income and good credit to qualify.

Federal student loan consolidation requirements

To qualify for a federal student loan consolidation through a Direct Consolidation Loan, you must meet the following requirements:

• You can only include federal student loans in a Direct Consolidation Loan.
• You must be a graduate, a student below half-time enrollment or no longer attending school.
• Your loans must be in repayment or a grace period.
• You may only consolidate an existing consolidation loan if you include at least one additional eligible loan in the new consolidation.
• You can only consolidate a defaulted loan if you must make repayment arrangements before you apply for consolidation.
• If a defaulted loan brought a court order or wage garnishment against you, you won’t be able to consolidate the loan until the judgment is terminated or the wage garnishment is dropped.

Private student loan refinance requirements

The requirements for refinancing private student loans are generally the same as they are for obtaining other types of credit and loans. You typically must have a strong credit history and stable income to refinance your loans at a lower rate. You’ll likely need a credit score of at least 670 to qualify. Of course, the higher your credit scores are, the more likely you’ll receive offers for lower interest rates.

If you don’t have good credit, you might consider applying for student loan refinancing with a cosigner with excellent credit. Another option is to work to improve your credit before applying for a new loan.

When consolidating your student loans makes sense

Depending on your goals for managing your federal student loans, you may benefit from a student loan consolidation. It may make sense to consolidate your federal student loans if you’re looking to:

• Make student loan management easier — Once your Direct Consolidation Loan is approved, you’ll have one payment, one due date and one student loan servicer.
• Keep federal loan protections and benefits — If you’re in a student loan forgiveness plan or an income-driven repayment plan, or you think you may want to take advantage of loan deferment and forbearance options, you can still lower your payment without losing these benefits.
• Get out of default — You can get a student loan out of default status by consolidating your federal student loans.

When refinancing your student loans makes sense

While the interest rate you receive can vary depending on the lender, the benefits of refinancing your student loan are generally the same no matter which lender you choose. You may want to refinance your student loans if you’re seeking:

• Loan flexibility — You can save on interest you’ll pay on your loans by refinancing them into a shorter repayment period. Conversely, you can lower your monthly payment by extending the repayment period, although doing so means you’ll pay more interest over the life of your loan.
• A lower interest rate — If your income and credit are better than when you initially applied for your original loans, chances are you may qualify for a better interest rate.
• Debt transfer — If you’re a parent who took out student loans to help pay for your child’s higher education, you can transfer the debt into their name when you refinance the student loans.

As mentioned before, refinancing your student loans may deliver the benefits you’re seeking, but you must understand the federal protections and benefits — such as access to loan repayment assistance and student loan forgiveness programs — you won’t have with a private loan.

If a student loan refinance is right for you, you can use Credible to compare student loan refinance rates from various lenders.

Other ways to manage your monthly student loan payments

If you’re looking for an easier way to manage your student loan debt, you may have other options besides consolidation or refinancing:

• Change your repayment plan — If your monthly payments for your federal student loans are more than you can afford, you may be able to switch to an income-driven repayment plan. In fact, you may qualify for payments as low as $0 per month.
• Deferment and forbearance — If you’re dealing with a temporary financial hardship, you might consider pausing your loan payments with a deferment or forbearance, if your lender offers these options. But remember, interest will continue to accrue in most cases even when your loan payments are on pause.
• Request a new due date or a payment pause — If you have private loans and you’re under financial duress, contact your lender to explore your options. Lenders might agree to a new due date, which can buy you some time. Similarly, your lender may not require you to send payments for a certain period of time but expect you to continue paying interest during that time.