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Student Loan Consolidation vs. Student Loan Refinancing

Student Loan Consolidation vs. Student Loan Refinancing
Jennifer Calonia
Jennifer CaloniaUpdated October 27, 2022
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You want to find a better solution for your student loan repayment, but what? Two student loan repayment strategies that are often referred to interchangeably are student loan consolidation vs. refinancing. The two approaches are similar in that you can combine multiple loans into one, but they result in different outcomes.In this story, you’ll explore the pros and cons of each so that you can make an informed choice on your next step with student loans.

What Is Federal Student Loan Consolidation?

If you have multiple student loans, you may be able to combine them into one loan with a fixed interest rate based on the average of the interest rates on the loans being consolidated. Your motivation could be lowering your monthly payment amount or gaining access to federal forgiveness programs.A federal student loan consolidation is done through the Department of Education’s Direct Consolidation Loan program. It lets you combine two or more federal loans into a new federal loan with a new fixed interest rate and repayment term.

Pros of Federal Student Loan Consolidation

There are a few advantages of a Direct Consolidation Loan for federal loan borrowers.

Can Offer Access to Valuable Federal Programs

Certain federal loan programs, such as income-driven repayment (IDR) plans and loan forgiveness options, are only accessible to borrowers with federal Direct Loans. Other types of federal loans, like Perkins Loans or Federal Family Educational Loan (FFEL) program loans, aren’t eligible.However, by consolidating Perkins or FFEL loans under a Direct Consolidation Loan, your loans become eligible for IDR and loan forgiveness.Direct Consolidation Loans are a repayment solution that can also maintain your eligibility for other federal protections, like forgiveness of a certain amount of debt. It also retains access to income-based extended deferment options, if needed.

Simplifies Your Repayment Experience

Over your education, you might’ve borrowed multiple student loans each academic year. If you’re swimming in varying student loan payment amounts and due dates, a consolidation can streamline your repayment schedule.You’ll end up with one Direct Consolidation Loan monthly payment and one due date to remember.

Doesn’t Require a Credit Check

You don’t need to undergo a credit check for a Direct Consolidation Loan. If your credit score isn’t strong, you’ll still have the same type of benefits and protections as a federal borrower with good credit. Any credit score below 580 is often considered poor, while one between 580 and 670 could be considered fair.

Cons of Federal Student Loan Consolidation

Although there are situations when it might be more advantageous to consolidate vs. refinance student loans, there are also disadvantages to consider.

Might Pay More in Interest 

A Direct Consolidation Loan will not necessarily lower your interest rate. Instead, a fixed rate will be calculated for your consolidated loan. This calculation is determined using the weighted average of your original rates and is rounded up to the nearest one-eighth of a percent.

Private Student Loans Are Ineligible

Only federal student loans are eligible for federal consolidation. If you have a mix of multiple federal and private loans, you can combine your federal loans through a Direct Consolidation Loan, but you’ll still need to make your private loan payments separately.Additionally, your private student loans are not eligible for the government benefits associated with federal loans, such as income-driven repayment plans or Public Service Loan Forgiveness. President Joe Biden has announced up to $20,000 in federal debt relief for those whose individual income is less than $125,000 (and household income is less than $250,000.) The part of your federal student loans that you refinance with a private lender is not eligible for government forgiveness, although the remainder of the loan could be refinanced.

Resets Your Credit Toward Loan Forgiveness

If you decide to consolidate any federal loans that were under an income-driven repayment plan, all previous payments that you’d otherwise receive credit for toward forgiveness generally aren't counted. You’re essentially starting your loan forgiveness journey with a blank slate so tread carefully.

What Is Student Loan Refinancing?

A student loan refinance allows borrowers to combine federal and private student loans. You can choose to include all federal loans, all private loans, or a combination of both into your refinance. This option is provided by a private lender. That lender pays the student balance included in the refinance in one payment. Afterward, it creates a new private student refinance loan which offers either fixed or variable rates, and a new repayment term.Like any student loan repayment strategy, the pros and cons of refinancing depend on your financial situation, and the type of loans you’d like to combine.

Pros of Student Loan Refinancing

If your credit has strengthened since you first borrowed your student loan, a student loan refinance offers a few key advantages.

Might Access a Lower Rate

Interest rates vary across refinancing lenders, based on your income and credit history. The stronger your credit score, the more you’ll be eligible for competitive interest rates. 

Lets You Remove a Cosigner

Although some private lenders allow borrowers to release their cosigner from a loan agreement after making successful payments, not all do. A refinance — vs. consolidation — can be a useful strategy to remove a cosigner from your original private student loan debt if your old lender doesn’t offer cosigner release. 

Simplifies Your Loan Repayment

Like a Direct Consolidation Loan, refinancing ultimately makes your repayment less convoluted since it results in fewer student loan accounts to track. You’ll have one payment amount due each month for the loans you combined through the private student loan refinance. This can help you stay on top of your education debt and potentially avoid forgetting about a payment.

Cons of Student Loan Refinancing

There are serious considerations to evaluate before proceeding with a private student loan refinance.

Lose Access to Federal Loan Forgiveness

Refinancing federal student loans changes them into private student loans with a private lender. Since these loans are no longer under the federal student loan system, they would be ineligible for loan forgiveness programsIf you’re already on track for loan forgiveness or might want to access income-driven forgiveness in the future for your federal loans, avoid refinancing that portion of the debt.

Varied Repayment Relief During Hardship

Federal loans extend borrowers a plethora of student loan relief options if they’re suddenly unable to make payments. Although some private refinance lenders offer temporary solutions if you’re facing financial hardship, the eligibility requirements and repayment options differ greatly between lenders. Read your loan terms closely and ask potential lenders about their repayment plan and deferment or forbearance options to fully understand your options.

Requires Good Credit 

You’ll need to undergo a hard credit check to move forward with a private student loan refinance. Refinancing lenders have specific underwriting requirements to determine whether you’re a creditworthy borrower that it’s willing to lend to. If you don’t meet their requirement, you might have to shop around for a lender with more credit flexibility. You might be able to add a cosigner to your refinance loan if the lender allows it to help you qualify and potentially get a competitive rate.

Differences Between Consolidation and Refinancing

The Takeaway

Consolidation and refinancing are similar in that they allow you to effectively combine multiple loans into a new loan with one monthly payment. However, their similarities end there.A consolidation loan is only available for federal student loans and can help you access a lower payment through a longer repayment period. Private student loan refinancing might help you access a lower interest rate, but you’ll forfeit government benefits for the amount of the federal loan that you refinance.If you’ve weighed your options and believe a student loan refinance is the best move for you, compare offers from multiple lenders. Lantern’s student loan refinance marketplace helps you compare your financing options based on your loan amount, zip code, and credit rating. Check your rates to get started!
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Frequently Asked Questions

Should I refinance or consolidate my student loans?
What is the difference between student loan refinancing and consolidation?
Can my student loans be forgiven if I consolidate?

About the Author

Jennifer Calonia

Jennifer Calonia

Jennifer Calonia is a Los Angeles-based finance writer who has covered the gamut, including student loans, credit card rewards, consumer loans, and debt. Her work has been featured in outlets like Bankrate, NerdWallet, Business Insider, Yahoo Finance, and U.S. News.
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