Understanding the difference between student loan consolidation and refinancing can be confusing. In this article, we examine the key differences between the two and compare the positives and negatives of both options. We also discuss the conditions when you might want to select one over the other.

What is the difference between loan consolidation and refinancing?

So let’s start with the basics. While the terms are often used interchangeably, consolidating your loans is not the same as refinancing them.

Loan consolidation is the process of taking out a new loan that combines some or all of your existing loans into a single loan with just one monthly payment. In the context of student loans, loan consolidation typically refers to consolidating multiple federal loans into one loan, which will typically be a Direct Consolidation Loan. While most federal student loans can be consolidated, including loans from the Direct, Perkins, and Federal Family Education loan programs, there are many rules on what loans can be consolidated together and what the terms of the new loan should be.

Refinancing involves paying off an existing individual loan and replacing it with a new one with different repayment terms, generally at a lower interest rate or a lower monthly payment. Note that refinancing may include consolidating your loans if you’re refinancing more than one loan.

You can refinance both federal and private student loans (either separately or together), while government-backed consolidation is available for federal loans only. You can still consolidate private student debt by refinancing with a private lender.

Consolidation vs. refinancing: benefits and negatives

Federal Consolidation
  • One monthly payment Simplifying your loans into one consolidated payment should lower the risks of defaulting on a monthly payment, particularly if you automate that payment. This also better protects your credit.
  • Single fixed interest rate Having multiple loans typically means multiple different interest rates, some fixed, some variable. Loan consolidation ensures a single fixed interest rate for the length of the life of the new loan. (Note: all federal loans have been fixed rate since 2006).
  • Lower monthly payments Consolidation offers a variety of repayment plan options, most of which extend the terms of the old loans up to 30 years.
  • Accessing repayment and debt-forgiveness plans If you consolidate loans other than Direct Loans, it may give you access to additional income-driven repayment plan options and Public Service Loan Forgiveness.
  • Increase in deferment/forbearance options Borrowers who have already reached the time limit on their forbearances and deferments may reset the clock to zero by consolidating. Consolidation is a new loan, eligible for the same deferments and forbearances as the original federal student loans.
  • Pay more in interest over time If you consolidate and extend the term of the loan, you will likely make more payments and pay more in interest over time. Generally, the longer the repayment period the more you pay in interest.
  • Weighted average interest rates The new loan’s interest rate will be the weighted average interest rates of the consolidated loans rounded up to the nearest eighth of a percent, meaning your interest rate may be higher for some loans.
  • Loss of benefits Consolidation may also cause you to lose certain borrower benefits—such as interest rate discounts, principal rebates, or some loan cancellation benefits—that are associated with your existing loans.
  • No grace period Borrowers typically get a six-month window before having to start repaying student loans. However, with consolidation your first bill will be due approximately two months after the Direct Consolidation Loan is disbursed. 
  • No private loan consolidation Student loans from private lenders or institutions can’t be part of the Federal Consolidation loan program. 
Private Loan Refinancing
  • Locking in preferential interest ratesWith a prolonged period of low interest rates there is a strong incentive to lock them in for the life of the loan. If you have private loans with variable interest rates you can remove the unpredictability of loan repayment by converting to a fixed rate loan.
  • Lower total costs Shortening the repayment term is a good strategy for lowering the total cost of the loan provided that you feel comfortable with the higher monthly payments.
  • Streamlining your paymentsIf you refinance multiple student loans, you can simplify your monthly payments by combining them into one easy monthly payment. This is especially helpful if you make payments to more than one loan servicer.
  • Higher total costs If you extend the repayment term of your loan to lower your monthly student loan payments, you may end up paying more over the life of your loan.
  • Loss of Income-Based Payment options the majority of private loans do not include an income-based repayment option, which allows you to make monthly payments based on your annual income and family size. 
  • Loss of benefits You may lose access to repayment plans or other benefits connected to your current loans, including federal benefits.
  • Loss of Current Borrower Rewards Any current borrower rewards that are attached to the loans you are refinancing will be lost, so be sure to check what new borrower rewards you will be eligible for.

When to consolidate vs. refinance

Now that you know some of the basics of student debt consolidation vs. refinancing you can consider which is right for you. It’s important to remember that there is no one-size-fits-all solution and that there are a number of factors you should consider before going down either route. These include:

Your specific set of circumstances

If you have multiple different student loans and are you are struggling to keep track of your various payments then consolidating them into one single monthly payment might seem like just the way to simplify your debt repayments. Alternatively, you might be looking to get on an income-driven plan for which you need to consolidate your existing debt. For example, Perkins Loans aren’t eligible for certain income-based repayment plans such as Pay-as-you-earn (PAYE), Revised Pay-as-you-earn (REPAYE), Income-based Repayment (IBR), or Income-contingent Repayment (ICR) unless you consolidate them first.

At the same time, there are a whole host of reasons why you might want to privately refinance. For instance, your existing loans have a higher interest rate and you want to lower them, you have a steady job and are confident you can make your monthly loan payments. Or, you might have built up a strong credit score and are looking for more competitive rates.

There might also be scenarios when it makes sense to both consolidate your federal student debt and private refinance.

Eligibility criteria

Before you can move forward you will need to understand the eligibility criteria associated with all the various consolidation and refinancing options out there.

While every plan will have its own individual criteria, many private refinancing providers will consider things such as whether you have stable income (typically more than $25k per year), your debt-to-income ratio (generally lower than 40-45%) and your credit history (Good credit/660 or above generally required) among other things. There may also be stipulations around the minimum/maximum student debt balance, whether you have graduated and your repayment history on your existing loans.

Generally speaking, federal consolidation loans have significantly fewer eligibility requirements than private refinancing programs as private lenders are looking at creditworthy borrowers. For instance, Federal consolidation does not require a credit check and is available to people currently in default.

Understanding the eligibility criteria associated with specific refinancing or consolidation options before you make an application is crucial as failed applications can harm your credit health.

Application process

The other factor to consider when applying for student debt consolidation or refinancing is the specific application process and what information is required both to be approved and to determine your interest rate and repayment terms. Exact requirements vary and depend on what support you are looking for. Information can include everything from proof of income (pay stubs), social security number, household costs (eg. mortgage), billing statements for existing loans and employers’ details.

Note that the application process for a Federal Direct Consolidation Loan is very different to private refinancing options.