Leaving college with multiple student loans can be overwhelming. As you start repaying that debt, you may want to consider student loan consolidation or refinancing. Both options may help you save money or at least feel more in control of your monthly finances, but there are major differences.
In this article, we’ll explain the pros and cons to help you decide if student loan consolidation or refinancing is the right option for you.
Student loan consolidation vs. refinancing
Choosing between student loan consolidation and refinancing is a big decision. While both options adjust your loan payments, they have different benefits and requirements.
Student loan consolidation generally refers to federal student loans. By combining your debts into a Direct Consolidation Loan, you can merge all or some of your federal student loans into a single new loan. Your interest rate on the new loan is a weighted average of the rates on all of the consolidated debt.
One of the perks of federal consolidation is that you can consolidate multiple types of federal loans, including subsidized, unsubsidized, federal PLUS, and Perkins Loans. In addition, you don’t lose any federal student loan protections, such as income-driven repayment, loan forgiveness, deferral, or forbearance options. The downside is you can’t include any private student loans in federal consolidation.
Student loan refinancing involves taking out a new private student loan and using it to pay off your existing federal and/or private student loans. The new loan has a different interest rate and loan term, allowing you to potentially lower your interest rate or reduce your monthly payments by extending the loan term.
The downside of refinancing is that you lose many of the protections that come with federal student loans.
Federal student loan consolidation
Federal student loan consolidation makes sense for borrowers with multiple federal loans who want one monthly payment to simplify their finances.
Consolidation won’t lower your overall interest rate, but you’ll keep the option to take advantage of student loan forgiveness programs and income-based repayment plans.
Eligibility requirements
Student loan consolidation is easier to qualify for than private student loan refinancing because your credit score and income aren’t a factor.
Most types of federal student loans are eligible for consolidation. To qualify, you must have graduated or dropped below half-time enrollment at school.
Interest rates and terms
The interest rate on student loan consolidation is a weighted average of the rates on the loans you include, rounded up to the nearest one-eighth of a percentage point. For example, let’s say you have four student loans, each with a balance of $10,000. Those loans have interest rates of 5%, 6%, 6.5%, and 6.75%. In that case, the interest rate on your new loan would be 6.125%. That’s (5 + 6 + 6.5 + 6.75) / 4 = 6.0625, which, when rounded up to the nearest one-eighth of one percent, is 6.125%.
In other words, you’d have a higher interest rate than one of your loans but a lower rate than the other three loans.
Depending on the amount you consolidate, you might also have the option to extend your loan term to up to 30 years to keep your monthly payments more affordable.
Keep in mind:
Think carefully before extending your loan term. Your monthly payment may be lower, but you’ll likely end up paying more interest over the life of the loan.
How to apply
To consolidate your federal student loans, log into your account at StudentAid.gov and complete the free Direct Consolidation Loan Application. You’ll need to provide your contact information, income, and information on your existing loans.
Once you submit your application, it takes 30 to 45 business days to process your application. In the meantime, continue to make payments on your existing loans as usual.
Once your application is approved, you’ll receive a statement summarizing the new loan terms, repayment schedule, and the total interest you’ll pay over the life of the loan.
Pros and cons
Before you complete a loan consolidation application, it’s important to understand the advantages and downsides.
Pros:
- You’ll have the option to extend your repayment term
- You won’t lose access to federal protections, including student loan forgiveness programs like income-driven repayment, deferral, or forbearance
Cons:
- You may pay more interest over the life of the loan if you extend your repayment term
- You won’t reduce your overall interest rate
Private student loan refinancing
Private student loan refinancing is available on any loan — federal or private. However, if you include federal student loans in a private refinance, you lose the benefits available to federal loan borrowers.
This isn’t always a bad thing, though. It depends on your financial situation and what you’re trying to achieve. For example, if you want to pay off your loans faster, you may benefit from refinancing into a loan with a shorter term and lower interest rate.
Check out: How To Refinance Your Student Loans in 6 Steps
Eligibility requirements
Eligibility requirements for private student loan refinancing vary based on your qualifying factors, including your credit score, income, and debt-to-income ratio (DTI).
Every lender has different requirements and terms, so it’s important to shop around and get prequalified by different lenders. However, some common eligibility requirements include:
- Being a U.S. citizen or permanent resident alien
- Graduating with a bachelor’s degree or higher
- Credit score of at least 680
Interest rates and terms
The interest rates and terms on private student loan refinancing vary by lender and depend on your credit profile and income. For example, if you have good or excellent credit, you’ll probably have a better chance of securing a lower interest rate than someone with average or poor credit.
How to apply
Each refinancing lender has different application requirements, but many offer online applications and the ability to prequalify without impacting your credit. Consider checking out a handful of lenders to compare your options.
Pros and cons
As with loan consolidation, there are pros and cons to consider before applying for student loan refinancing.
Pros:
- Potential to lower your interest rates
- You may be able to include a cosigner for better rates and loan terms
Cons:
- You lose access to federal protections when you refinance federal student loans
- You may not qualify if you have poor credit and low or no income
Credible rating
Fixed (APR)
5.48% -
Loan Amounts
$10,000 up to total refinance amount
Min. Credit Score
680
Credible rating
Fixed (APR)
5.49% -
Loan Amounts
$5,000 - $250,000
Min. Credit Score
680
Credible rating
Fixed (APR)
5.85% -
Loan Amounts
$5,000 - $250,000
Min. Credit Score
670
Credible rating
Fixed (APR)
6.00% -
Loan Amounts
$7,500 - $200,000
Min. Credit Score
700
Credible rating
Fixed (APR)
6.20% -
Loan Amounts
$10,000 up to the total amount
Min. Credit Score
670
Credible rating
Fixed (APR)
6.34% -
Loan Amounts
$7,500 - $250,000
Min. Credit Score
680
Credible rating
Fixed (APR)
6.49% -
Loan Amounts
$10,000 - $750,000
Min. Credit Score
Does not disclose
All APRs reflect autopay and loyalty discounts where available | LightStream disclosure | SoFi Disclosures | Read more about Rates and Terms
Should I consolidate my loans or refinance them?
Deciding whether to take advantage of student loan consolidation or refinancing is a big decision. So which should you choose?
Consider consolidation if you don’t want to lose out on federal loan benefits, such as student loan forgiveness, or if you worry your income may decrease and you’ll want to apply for an income-driven repayment plan in the future.
On the other hand, consider refinancing if you have excellent credit and a low DTI. This means you’ll have a better chance at qualifying for a lower interest rate, which could help you save money. However, you should only consider refinancing if you have private student loans or aren’t concerned about losing federal protections.