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Student Loan Consolidation vs Refinancing

Comparing two solutions for student loan debt relief, so you know which one is right for you.

consolidation vs. refinancing

If you have student loan debt to repay, you’re probably trying to choose between two basic solutions:

  1. Student loan consolidation
  2. Student loan refinancing

When it comes to finding debt relief, student loans are fairly unique. Both consolidation and refinancing for student loans work differently that when you use those same terms for other types of debt. In some cases, these two options can be used together. In others, you may just need one. So, here is everything you need to know about student loan consolidation vs refinancing…

What is student loan consolidation?

Like other types of consolidation, student loan consolidation refers to the process of combining multiple loans into one monthly payment. You roll multiple debts of the same type into a single, simplified repayment schedule.

There are two ways to consolidate student loan debt:

  1. Federal loan consolidation only applies to most types of federal student loans. You use a Federal Direct Consolidation loan to combine loans from different federal programs. This makes more of your debts eligible for federal repayment plans and loan forgiveness.
  2. Private loan consolidation allows you to combine both federal and private student loans into a single payment, often at a lower interest rate. However, this makes any federal loans you include ineligible for federal loan relief programs.

In the case of private consolidation, it works much the same as other types of debt consolidation. The goal is usually to lower your interest rate and it may reduce your monthly payments. Because the APR applied to your debt is lower, you can often get out of debt faster, even though you may pay less each month.

By contrast, the goal of federal consolidation has nothing to do with the interest rate applied to the debt. The interest rate on the consolidated debt is always a weighted average of the rates on your original loans. Instead, the main goal here is to ensure as much of your student loan debt as possible is eligible for federal relief options. Your Stafford, FFEL, Direct and even PLUS loans for graduates can be rolled into a single payment. It makes all those debts eligible for a repayment plan, as well as loan forgiveness.

Pop Quiz

What type of federal student loan cannot be consolidated using a Federal Direct Consolidation Loan?

a) Unsubsidized Stafford Loans

b) Perkins Loans

c) PLUS Loans for Parents

d) Supplemental Loans for Students

Reveal Answer

PLUS loans for parents cannot be consolidated using a Federal Direct Consolidation Loan, nor are they eligible for any federal relief programs. PLUS loans for graduate students, however, can be consolidated through the Federal Direct Program.

c) PLUS Loans for Parents

Return to question

What is student loan refinancing?

Student loan refinancing refers to the process of reducing the interest rate applied to one specific loan. And it’s always strictly private – you can’t go through a federal program to refinance a loan. That’s because federal loan interest rates are never based on your credit score. Since good or bad credit is not a factor, you can’t really refinance to qualify for a lower interest rate. Federal relief options always use a weighted average of the loans you already had.

However, you can use a loan from a private lender to refinance student loan debt. With a private lender, the rate of the loan does depend on your credit score. So, if you have a better score than when you first applied for your loan, you can qualify for a better rate.

In addition, you can refinance government student loans to get a rate based on your credit score. This may lower the rate applied to the debt, meaning you can get out of debt faster with lower total costs.

Consolidation vs Refinancing OR Consolidation & Refinancing

When it comes to relief options from private lenders, these two solutions usually go hand in hand. You often refinance the debt when you take out a consolidation loan. You qualify for a lower rate on the consolidated debt, meaning your consolidation loan also provides the benefit of refinancing.

By contrast, with federal relief options, consolidation rarely provides the benefit of true refinancing. Using a weighted average of your original loan interest rates means that you end up somewhere in the middle; some of the debt will be at a lower rate, while some will be higher.

Really, if you want to refinance for a lower interest rate, private student loan consolidation is almost always the best way to refinance student loans.

Refinancing student loans after consolidation

Refinancing consolidated student loans is possible with private student loan consolidation. You can use this option whether you used a Federal Direct Consolidation loan or private consolidation loan. Again, just remember that using a relief option from a private lender effectively converts your debt to private; so, you won’t be eligible for things like hardship-based repayment plans or loan forgiveness.

Refinancing private student loans after consolidation

Let’s say you use a consolidation loan from a private lender for your existing student loan debt. You’ll qualify at an interest rate that’s based on your credit score. However, many college students and even recent graduates don’t exactly have great credit. If you’ve only used credit for a limited amount of time, you don’t have many credit cards or you haven’t been responsible about making your payments on time, your credit score could be weak or nonexistent.

In this case, you may want to refinance your consolidated student loans later on down the road. Once you’ve had time to improve your credit score, you would go back to the lender (or a different lender) to refinance. This would lower the interest rate, which would reduce your total cost to get out of debt. It might also lower the monthly payment amount, which makes it easier to afford repayment on a tight budget.

Refinancing federal student loans after consolidation

Here’s a brief description of how federal student loan interest rates work: Under the current system, interest rates on federal loans are set every year on July 1. The rate is based on the 10-year Treasury note index (that’s the rate applied to 10-year T-notes, which are a type of investment). T-note rates are higher when the economy is strong (like in 2017) and lower when the economy is weak (like during the Great Recession).

This means that the rates on your federal loans depend on the economy and not your credit score. That’s good for students who either don’t have a credit score because they’ve never used credit or have bad credit because they haven’t used it enough to achieve a good score. You generally get rates that are better than credit-based rates on other types of loans.

Fact: The interest rate on a Federal Direct Loan issued after July 1, 2017 was 4.45% for undergraduates, but 6% for graduate students.

But the rates aren’t always better than what you could qualify for with an excellent credit score from a private lender. For instance, if you’re a graduate student using a Direct loan you took out in 2017, the rate was 6%. Private lenders offer rates around 5% on personal loans if you have excellent credit, and these lenders often offer even better rates on private student loans vs personal. So, in this case it might make sense to convert your federal debt to private to get a better interest rate.

If you used a Federal Direct Consolidation Loan and want a better rate, you simply refinance the consolidated federal loans with a private loan. Again, the only downside is that you’re no longer eligible for federal programs. However, if you’re not in public service and can’t qualify for student loan forgiveness, this may not be an issue.


Article last modified on December 28, 2017. Published by, LLC . Mobile users may also access the AMP Version: Student Loan Consolidation vs Refinancing - AMP.