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Student Loan Consolidation and Student Loan Refinancing — Differences, Pros, and Cons

Student Loans
Chris Fuller

Being a student in the United States can get quite expensive. According to Make Lemonade’s student loan statistics, in 2018, more than 44 million students were paying off a student loan.  That’s a massive sum that clearly shows how much students struggle with their debt.

Many of them face the decision between consolidating and refinancing their student loan sooner or later. To make the right choice, it’s essential to learn what you can expect from each process and what the pros and cons are. To help you decide, let’s have a closer look at student loan consolidation and student loan refinancing.

What Is Student Loan Consolidation?

A student loan consolidation means you’ll be gathering all the student loans you’re currently paying under one new loan. As you’ll read later in the article, this is where consolidation and refinancing are similar. However, with consolidation, you’ll also be getting a new interest rate, which is going to be the weighted average of your existing rates.

Consolidation is very beneficial for those who don’t want to be making multiple student loan payments every month. However, it might not be the best fit for everyone, as there are certain restrictions to keep in mind.

What Are the Loans Eligible for Student Loan Consolidation?

Only federal student loans are eligible for a Direct Loan Consolidation. These loans include:

  • Federal Family Education Loans (FFEL)
  • Federal Direct PLUS Loans
  • Federal Direct Subsidized Stafford / Direct Loans
  • Federal Direct Unsubsidized Stafford / Direct Loans
  • Federal Direct Consolidation Loans

If you have a private student loan, it won’t be eligible for a Direct Loan Consolidation. That’s one of the downsides of student loan consolidation, and it’s an area where refinancing might have an edge.

What Is Student Loan Refinancing?

Student loan refinancing also unifies your student loans under one monthly bill. However, in addition to that, refinancing gives you more options than student loan consolidation. You can refinance both a private and a federal student loan, and there’s a possibility of renegotiating some terms of your loan, such as the repayment rate.

When you refinance a student loan, your credit score score and income are taken into account, which makes it much easier to get a more manageable monthly sum. As such, the estimation of how much you can afford to pay monthly will be accurate. That’s beneficial for those who have a regular, stable income, for example.

Interest Rates for Consolidation and Refinancing

Interest rates are always a hot topic in the finance world, as they can have a big impact on your loan and future debt. This is why it’s beneficial to take a good look at the differences in interest rates for consolidation and refinancing before you make your choice.

As we stated previously, the interest rate won’t decrease if you opt for consolidation. The weighted average of your existing student loan interest rates is rounded up to the nearest 1/8%, which means that you can’t save on consolidation interest rates.

However, it’s a different situation for refinancing student loans. Depending on your credit score and income, it’s possible to qualify for a lower interest rate when refinancing your student loan. In the long run, this may save you a lot of money, so it’s an option worth looking into if you think it might be a good fit.

Repaying Consolidated and Refinanced Loans

There are also differences between student loan consolidation and refinancing when it comes to the repayment terms. If you’re opting for federal student loan consolidation, in most cases there will be a somewhat short repayment term of 10 years. Even though that’s the standard, it’s possible to find an income-driven repayment plan that would prolong the payment term. With PAYE or REPAYE, you can have a repayment term of 20 to 25 years.

However, if you choose to refinance your student loan, your repayment term will depend on the lender. They’re usually more flexible, and you have the option to go for both a shorter and a longer repayment term. The shorter-term might be more challenging financially, as your monthly payment would be higher, but you’d be paying less in interest. With a longer-term, the interest rises, and it takes more time to pay off the loan that way.

How to Know Whether You Should Consolidate

Consolidation of student loans is most useful as an organization tool to eliminate multiple federal student loan payments. With consolidation, you will have one monthly payment, which can significantly simplify your student loan situation. 

In addition to that, you can enjoy some benefits that come with having a federal student loan: forbearance and deferral. It’s also a good option for those who have income-driven repayment plans like IBR, ICR, PAYE, and REPAYE.

How to Know Whether You Should Refinance

Refinancing a student loan also has the organizational tools aspect, as it will turn your payments into a single monthly payment after you refinance. However, with refinancing providing you more flexibility, there are multiple additional reasons to do it. If you have a good credit score and a steady income, refinancing is a good choice, as you’ll be able to get a lower interest rate. 

You can also control how quickly you will repay your student loan. If you don’t plan on using income-driven repayment plans or public service loan forgiveness, student loan refinancing is the right choice for you.

Key Takeaways

Student loans seem to be the necessary evil of higher education in the U.S. nowadays, but that doesn’t mean they have to give you headaches. With student loan consolidation and student loan refinancing, you have a few sound options that could make paying off your student loans a bit easier.

However, it’s important to learn all you can about the pros and cons of each option, and realistically compare them to your situation. Make sure to choose the option that’s right for you.