Refinancing Consolidated Federal Student Loans: Can You and Should You?

If you’d like to combine your student loans, change your monthly payment, or get a lower interest rate, you’ll need to choose between consolidation or refinancing. Although these terms are often used interchangeably, they have different meanings, so it’s important to understand the difference between consolidation vs. refinancing.

Consolidating your student loans:

• Combines existing federal loans into a Direct Consolidation Loan
• Applies only to federal student loans
• Retains federal benefits and protections

Refinancing your student loans:

• Combines existing federal and private loans into a new private loan
• May or may not lower your interest rate
• Removes your access to federal benefits and protections

What is the difference between consolidation and refinance?

Choosing between consolidation and refinancing for your student loan is an important decision. If you refinance your federal student loans with a private company, you risk losing out on certain federal benefits, such as income-driven repayment plans and forgiveness options.

Consolidating your federal loans preserves or even gains federal benefits, but this option isn’t available for private student loans.

When should I consolidate or refinance?

You might choose to consolidate if you:

• Have multiple federal loans
• Want to keep your federal benefits
• Have a FFEL or Perkins loan and want the option for an income-driven repayment plan
• Are looking to simplify and streamline your student loans

On the other hand, refinancing might be the right choice for you if you:

• Have private loans or a blend of federal and private loans
• Aren’t concerned with retaining federal benefits
• Want to retain control over which lender you use

Keep in mind you’ll lose federal protections if you refinance federal loans to a private loan. Make sure it’s the right decision for you before you move forward with this option.

Pros and cons of consolidation

A Direct Consolidation Loan has several advantages, including:

• Keeps access to income-driven repayment plans and forgiveness options
• Can lower your monthly payment
• Streamlines multiple federal loans into one

However, there are drawbacks to this type of loan, namely:

• It’s only available for federal loans
• You can’t consolidate a parent PLUS loan together with a loan (or loans) in the student’s name
• You’ll extend your repayment period, adding to your interest costs

Pros and cons of refinancing

If you go the refinancing route, there are several benefits:

• You can get a lower interest rate (if your credit qualifies)
• You’ll have just one loan to keep track of
• You choose the lender
• You may be able to shorten the repayment period and pay less interest

But refinancing comes with a couple of drawbacks:

• You’ll lose federal benefits if you refinance federal loans
• You might not save money if you don’t qualify for the best interest rates

How to consolidate federal student loans into a Direct Consolidation Loan

Here’s how to consolidate your federal student loans:

• Choose your loans. Decide which of your loans you’d like to consolidate into a Direct Consolidation Loan. Only federal education loans are eligible for direct consolidation — private student loans are not.
• Complete an application and apply. Next, fill out the application, available at studentaid.gov. You can apply for the loan online in as little as 30 minutes, or you can send your application in by mail.
• Keep making payments. Once you’ve applied and been approved, the loan consolidation process usually takes about four to six weeks. Keep making payments to your existing servicer until your new loan is ready.

Requirements to consolidate

The following loans are eligible for a Direct Consolidation loan:

• Direct Subsidized Loans
• Direct Unsubsidized Loans
• Direct PLUS Loans
• Federal Stafford Loans from the Federal Family Education Loan (FFEL) Program (both subsidized and unsubsidized)
• FFEL PLUS Loans
• FFEL Consolidation Loans and Direct Consolidation Loans (some conditions apply)
• Perkins Loans
• Nursing Student and Nursing Faculty loans
• Health Education Assistance loans
• Health Professions Student Loans
• Loans for Disadvantaged Students

In addition, you must have graduated from school, dropped out, or be attending less than half-time to consolidate. Your loans must also be in repayment (or in a grace period).

How to refinance student loans into a private loan

You can refinance private or federal loans (or both). If you’re planning to refinance, here’s what you need to do:

• Research and compare lenders. Be sure to compare as many student loan refinance companies as possible to find the right loan for your needs. Consider not only interest rates but also repayment terms, any fees charged by the lender, and eligibility requirements.
• Pick a loan option. After you’ve compared lenders, choose the loan that works best for you. For example, if you want a shorter repayment term, you can pick a lender that offers five- or 10-year terms.
• Complete the application. Once you’ve picked a lender, you’ll need to fill out a full application and submit any required documentation, such as tax returns or pay stubs. Also be prepared to provide information about the student loans you want to refinance.
• Manage your payments. If you’re approved, continue making payments on your current loans while the refinance is processed. Afterward, you could consider signing up for autopay so you won’t miss any future payments — many lenders offer rate discounts to borrowers who opt for automatic payments.

Requirements to refinance

To qualify for a new loan with a private lender, you’ll typically need the following:

• Good credit (typically a MyFICO score of 670 or above)
• Stable income
• Low debt-to-income ratio

If you need a boost, applying with a cosigner might help.

Consider refinancing only some of your loans

If you have multiple student loans, keep in mind that you don’t have to refinance all of them. For example, if you have a mix of federal and private student loans, you might want to refinance only the private loans so you can maintain your federal benefits and protections.

Be mindful about which federal loans you refinance. While refinancing might be a good idea if you have a federal student loan with a high interest rate, you probably don’t want to refinance a federal loan that might qualify for loan forgiveness down the road.

Dori Zinn and Taylor Medine have contributed to the reporting of this article.