What is Refinancing vs. Consolidation?

What is the difference between refinancing vs. consolidation and which option (if either) is better for you?

Let’s see if we can break it down for you.

Federal loan consolidation

As its name suggests, consolidating means combining multiple federal loans into just one loan. Federal student loan consolidation is offered by the government and is available for most types of federal loans:

  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • Subsidized Federal Stafford Loans
  • Unsubsidized Federal Stafford Loans
  • Direct PLUS Loans
  • PLUS loans from the Federal Family Education Loan (FFEL) Program
  • Supplemental Loans for Students (SLS)
  • Federal Perkins Loans
  • Federal Nursing Loans
  • Health Education Assistance Loans

Since you are generally charged the weighted average interest rate of the loans being combined, this option typically does not save you much money. There are some benefits though:

  1. Fewer bills and payments to keep track of each month.
  1. Locking in a fixed rate especially helpful if you are consolidation variable rate loans as it offers some protection from having to pay higher rates should interest rates go up.
  1. Lower monthly payments. But this is usually means lengthening your payment term, which means you’ll have to pay more interest over the life of the loan.

Student loan refinancing

Refinancing is when you apply for a loan under new terms and use that loan to pay off one or more existing student loans. A refinance loan often allows you to:

  1. Lower your monthly payment.
  1. May reduce the time it takes to pay off your loan.
  1. Save money paying over the life of your loan.
  1. Enjoy the benefits of consolidation (e.g., one monthly check).

Unlike consolidation, refinancing is available from private lenders, and allows for federal loans and private ones to be combined,

It’s important to note that Federal loans offer certain benefits and protections (such as Public Service Loan Forgiveness and income-driven repayment plans) that do not transfer should you refinance.  If you’re considering refinancing, you should first take a look at your federal loans to see if any of these benefits apply to you.