Student Loan Consolidation Vs. Refinancing

  • You can only consolidate federal loans; private student loans are not eligible for the program.
  • Student loan refinancing allows you to get a lower interest rate than your original loan term.
  • When you refinance federal loans with a private lender, you lose some important borrower protections.
  • Read more about Insider Loans for Student Loans here.

The difference between credit consolidation and refinancing can be confusing, especially because the terms are sometimes used interchangeably. However, these are two different processes, and depending on your financial goals, one may be better for you than the other.

What is Student Loan Consolidation?

With a direct consolidation loan, you can combine or combine multiple federal loans into one loan. There is no consolidation fee for your federal loan. If a private company is helping you with the application and charging you a fee, it is a red flag. Student loan consolidation does not require a credit check.

Remember that consolidating your student loan will not save you any money, but that does not mean that you will not be able to benefit from the process. You have fewer payments to keep track of each month and if you are dissatisfied with your loan service provider you will get a new one when you consolidate.

If you are consolidating loans other than direct loans, you may be eligible for income-based repayment plans and public service loans. If you already have direct loans, you can keep these consolidation benefits.

If you have federal floating rate loans (which were last disbursed in 2006), consolidation allows you to convert them to fixed rate loans. You can also lower your monthly payments by opting for a longer term – but this option costs more interest overall.

However, when you consolidate your loans, any outstanding interest becomes part of the main balance on your new loan. This means that interest can accrue on a larger principal balance than if you had not consolidated.

What is Student Loan Refinancing?

If you are looking for a lower interest rate on your student loan, consider refinancing. Depending on your current financial profile, private lenders may offer you better terms than your original loan. Refinancing the student loan requires a credit check on which your interest rates are based.

When refinancing, you can switch from a fixed rate loan to a floating rate loan, which may allow you to secure a lower rate for yourself. However, as the name suggests, floating rate loans can fluctuate and you may end up paying a higher interest rate than if you had stayed with a fixed rate loan.

Be careful before you refinance federal student loans. You waive all current and future government borrower protection measures, such as:

You are also not eligible for certain repayment options, such as income-based repayment plans, which take your specific income and family size into account when determining monthly payments and protect you in the event of a job loss. Your savings on interest payments may not make it worth losing these perks.

On the other hand, when you are refinancing private student loans, there are almost no downsides. There are usually no refinancing fees and you may get better interest rates on your new loan – especially if your credit history has improved since you received your first loan.

When deciding between refinancing or consolidating your loans, make sure that you understand both processes and choose the one that makes the most sense for you.

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