When to Consolidate and Refinance Your Student Loans
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Jill A. Chafin is a staff writer at LendingTree, where she covers a variety of personal finance and small business topics. Her work has appeared on the Motley Fool’s Blueprint, How-to Geek’s Life Savvy, as well as her own blog.
Before joining LendingTree, Jill spent 20+ years as a freelance writer and editor. She has received multiple awards for her creative writing, with pieces published in literary anthologies such as the Personal Story Publishing Project. She has experience running her own business and loves helping others pursue their entrepreneurial dreams.
Jill earned a writing certification from the Whitireia Community Polytechnic in New Zealand and a bachelor’s degree from the University of North Carolina at Chapel Hill.
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Xiomara Martinez-White is a copy editor at LendingTree and its associated companies, where she edits multiple personal finance verticals.
Previously, she was a copy editor at BDG Media and its flagship publication, Bustle, and first honed her copy editing craft as a fashion assistant with the International Herald Tribune, working in Paris under famed fashion editor Suzy Menkes. She has also held internships at publications such as Marie Claire, People.com and the Metro.
Martinez-White earned a B.A. in English Language & Literature at Smith College and an M.A. at the City University of New York Graduate School of Journalism, concentrating in Arts and Cultural Journalism. She also attended the University of Cape Town and CELSA Paris as a visiting student.
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Michael Kitchen joined Student Loan Hero in 2017 (now a part of the LendingTree family), writing and editing reports about the student debt crisis, as well as consumer debt in general. In addition to working on LendingTree articles, he also appears in print and on television and radio to offer information and suggestions about personal finance.
Prior to that, Michael spent 20 years working in news, covering beats ranging from finance and markets to politics and conflict. He has previously worked for MarketWatch, Dow Jones Newswires, Voice of America, Time Magazine, National Public Radio and others.
While “student loan consolidation” and “student loan refinance” are often used interchangeably, there are key differences between these two repayment options. And in fact, you can even refinance consolidated student loans.
Consolidating simplifies your various federal student loan payments into one easy-to-manage Direct Consolidation loan. You won’t receive a lower interest rate but extending your repayment term can lower your monthly bill.
Refinancing combines private and/or federal student debt into a private loan, while potentially lowering your interest rate — but, be aware that you’ll lose certain government protections if you refinance federally-held student loans.
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Student loan consolidation vs. refinancing
| Student loan consolidation | Student loan refinancing | |
|---|---|---|
| Key features | Combine some or all of your federal loans into one easy-to-manage monthly payment. Repayment terms range from 10 to 30 years. | Combine some or all of your student loans into a new loan, hopefully with a lower interest rate. Repayment terms range from five to 20 years. |
| Loans you can combine | Federal student loans only | Private and/or federal student loans |
| Lender details | U.S. Department of Education | Banks, credit unions or private lenders |
| Interest rate | Weighted average of combined loans | A new rate based on your credit score and other criteria |
| Potential savings | No. While a longer term can lower your payment, you’ll pay more interest in the long run. | Yes, if you can secure a lower interest rate |
| Access to federal benefits | Income-driven repayment plans, student loan forgiveness, forbearance and deferment | None |
Federal student loan consolidation
With a Direct Consolidation loan, the government pays off your selected federal student loans and issues a new loan with a single monthly bill.
There are no credit or income requirements to qualify, but you won’t receive a lower interest rate. Instead, your new rate is calculated by taking the weighted average of the combined loans, rounded up to one-eighth of 1%.
Consolidation could be a good fit if any of the following apply:
- You want to simplify your payments with one easy-to-manage monthly bill.
- You need to consolidate parent PLUS loans, Federal Family Education Loans (FFELs) or Perkins loans to be eligible for income-driven repayment or public service loan forgiveness.
- You need a plan for getting out of student loan default.
- You want a longer repayment term.
When you consolidate your loans, you’ll get a new repayment term ranging from 10 to 30 years based on your overall student loan balance. Typically, you’ll have 60 days until payments begin.
Important: A federal consolidation loan is completely free through the Department of Education. Be aware of scamsters charging a fee to consolidate your loans.Pros and cons of consolidation
| Pros | Cons |
|---|---|
Keep access to generous repayment and loan forgiveness programs Can lower your monthly bill (by extending repayment term) Simplifies repayment by streamlining multiple loans into one | Extending your loan’s term will usually increase your interest costs Possible loss of credit toward student loan forgiveness Unpaid interest could be added to your principal |
How to consolidate federal student loans
You can access the Direct Consolidation loan application via your studentaid.gov account. Gather the required documents in advance, since you’ll have to complete the online application in one session — it typically takes people less than 30 minutes to complete, according to Federal Student Aid. Paper applications are also available.
You’ll be prompted as to which loans you wish to consolidate. You’ll then receive a repayment term based on your total loan balance, or you can pick an income-driven repayment plan based on your income.
Consolidation can also help get your student loans out of default. To do so, you have to make three consecutive payments in full and on time and then commit to enrolling in an income-driven repayment plan.
Make sure to continue making all required student loan payments until you receive confirmation that your Direct Consolidation loan has been approved.
Private student loan refinance
To consolidate private student loans, you’ll have to do a student loan refinance. The even bigger benefit of refinancing, beyond combining your loans, is the chance for a lower interest rate — this can save money in the long run.
Private lenders will review your financial history, such as credit score, income, and debt-to-income (DTI) ratio, to determine your creditworthiness. A good to excellent credit score (or a creditworthy cosigner) can help secure the most competitive rates and flexible repayment terms.
Plus, unlike with federal student loans, you’re likely to have access to variable interest rate loans, rather than just loans with fixed rates. While a variable rate can fall over time, saving you money, it can also rise significantly, depending on the economy and market conditions.
Refinancing might be a good fit if any of the following apply:
- You have private student loans
- Your FICO Score is in the mid-600s or higher
- You have a steady income and a low debt-to-income ratio
- You can qualify for a lower student loan interest rate
Important: While you can refinance federal student loans, it’s generally not a good idea. You lose government protections when you refinance federal loans, such as access to income-driven repayment plans, forbearance and deferment and student loan forgiveness programs.Pros and cons of refinancing
| Pros | Cons |
|---|---|
A lower interest rate (if you meet the criteria) Just one loan to manage Ability to pick your lender | Difficult to qualify for the lowest rates Loss of federal benefits if you refinance federal loans Variable rates could cost you more |
How to refinance private student loans
Unlike a federal student loan consolidation, you can pick whichever lender suits you best. Do some research to find a good fit, since refinance lenders cater to different types of loans. Check out our list of preferred student refinance lenders to start your search.
For example, some lenders, like Citizens Bank, might refinance your student loans even if you didn’t finish your degree. Others, such as SoFi, may refinance international student loans.
Check your credit score in advance to see where you stand. You can typically get a ballpark rate by entering basic info with various lenders. Use our student loan refinance calculator to estimate your potential savings.
Don’t forget to keep paying your student loans until the refinance is complete.
Frequently asked questions
Yes, you can refinance any federally-held student loan with a private lender, including Direct Consolidation loans.
However, you’ll forgo government benefits when you refinance federal loans. You might also unnecessarily extend your repayment term or switch to a lender who charges origination or other frivolous fees.
Because of this, it’s worth weighing the pros and cons of refinancing student loans before proceeding.
Consolidating your federal student loans can be a smart move if you want to simplify your monthly payments or need to consolidate to qualify for certain programs, such as Public Service Loan Forgiveness (PSLF).
While consolidating can often lower your monthly payment by extending your repayment term, this generally results in more paid interest over the life of the loan. If your main goal is to save money, consider refinancing for a lower interest rate.
Consolidating doesn’t have credit requirements, though you will need qualifying federal student loans that are active or in the student loan grace period. For delinquent or defaulted student loans, consolidating might help them regain good standing.
On the other hand, refinancing does have credit requirements. You (or your student loan cosigner) need to have a strong credit history and steady income to secure the most competitive rates and terms.
There’s no limit to how many times you can refinance your student loans, so you can switch lenders and rates as often as you like. The only barrier is dealing with the application and other paperwork.
That said, extending your repayment term will keep you in debt longer, resulting in more paid interest. You’ll also want to read the fine print to ensure that any origination fees or other costs don’t negate the benefit of multiple refinances.
While refinancing is one way to pay off student loans fast, be sure to crunch the numbers to ensure it’s the best move for your situation.