Federal Student Loan Consolidation vs. Refinancing

Ben Luthi Published on April 23, 2019

Parent PLUS Loan

If you’re looking for ways to simplify your student loan repayment strategy or pay down your balance more quickly, you may be considering consolidation or refinancing your debt.

But while the two terms are similar with other types of debt, they’re completely different paths you can take with student loan debt. To make sure you do what’s best with your student loan debt, it’s essential to understand how each option works and what to expect with the process.

What is student loan consolidation?

Student loan consolidation usually refers to a federal Direct Consolidation Loan, which is a program provided by the U.S. Department of Education for federal student loan borrowers only — private student loans aren’t eligible.

A Direct Consolidation Loan allows you to combine multiple federal loans into one new loan, which can simplify your monthly payments if you have loans with more than one servicer. Unlike with refinancing, you don’t need to undergo a credit check when you consolidate student loans.

Consolidating can also help you extend your repayment period to up to 30 years, lowering your monthly payments. It may also help you gain access to certain federal student loan benefits you might not have had before.

For example, Parent PLUS loans are eligible for an income-contingent repayment plan only after they’ve been consolidated. Also, consolidating defaulted federal loans can bring them out of default and restore benefits you may have lost while the debt was in collections.

That said, consolidating federal loans through the U.S. Department of Education is unlikely to save you money. The interest rate on your new loan is the weighted average rate of the loans you want to consolidate, rounded up to the nearest one-eighth of a percent.

And if you extend your repayment term with your consolidation loan to get a lower monthly payment, that means you’ll also pay more in interest over the life of the new loan.

Finally, if you’re already on an income-driven repayment plan or in the Public Service Loan Forgiveness program when you consolidate student loans, it resets the clock on your eligibility for loan forgiveness under those programs.

What is student loan refinancing?

Refinancing student loans involves working with a private lender instead of the federal government. Borrowers can refinance federal student loans, as well as other private student loans, and can even combine the two types into one new loan.

You can also leave low-interest federal loans with your current servicer and refinance your higher-rate loans.

If you qualify, refinancing can help you lower your interest rate, monthly payment, or both. Student loan refinance lenders may also be able to provide more flexible repayment options, including a shorter repayment term if you want to eliminate your debt faster.

Because you’re working with private lenders, you’ll need to undergo a credit check to get approved for student loan refinancing. That said, there are several lenders out there from which you can choose, and each has its own eligibility criteria.

If you don’t qualify on your own or can’t get a lower rate than what you’re currently paying, you can often apply with a co-signer with great credit and income to improve your chances.

The main drawback of refinancing your student loans is that you’ll lose access to federal benefits, including loan forgiveness programs and income-driven repayment plans. Also, some student loan refinance lenders may have less generous deferment and forbearance options than what the U.S. Department of Education provides.

Finally, student loan refinance lenders may give you fewer options than the government if you end up defaulting on your student loans.

Consolidation vs. refinancing: which should you choose?

Neither option is inherently better, so it’s important to know your needs and goals before pursuing one.

Consolidation, for instance, is best for borrowers who don’t have a stable income situation and may need access to an income-driven repayment plan. It’s also worth considering if you already have low interest rates and just want to simplify your monthly payments.

Refinancing student loans, on the other hand, is best if you have high interest rates or want more flexibility with payments and don’t need federal loan benefits. More specifically, it’s worth applying if you have a strong credit history and a solid job or you can find a co-signer with those attributes.

To decide which option is better for you, think about what your goals are with your student loans. Then consider your current financial situation and check your credit score to see what your chances are of qualifying for refinancing.

If you want to refinance student loans but aren’t eligible on your own or with a co-signer, work on boosting your credit and income to improve your chances of qualifying.

How to compare student loan refinance lenders

If you’re considering refinancing your student loans, your best chance of getting the best loan available is to shop around. Using Purefy’s Find My Rate tool, you can compare rates from multiple lenders in one place with just a soft credit check, which won’t affect your credit score.

The tool also allows you to calculate how your monthly payments and the total cost of your current loans compare to what you may qualify for through refinancing.

As you go through this process, make sure to review more than just the rates, though. Be sure to also look at other features each lender offers, such as the option to release your co-signer from the loan, deferment and forbearance terms, and autopay discounts.

With this holistic approach, you can better ensure that you’ll get the best loan for your needs.

Next Steps

If you’re still not sure which option is best for you, keep in mind that you can always refinance student loans that have been consolidated, but you won’t be able to request federal student loan consolidation on refinanced loans. So select the path that gives you more options in the future when you’re certain about what you would like to do.

Regardless of which path you decide to pursue, it’s important to start the process as quickly as possible. Whether you just want a simpler monthly payment or you’re looking to save money or gain flexibility, the sooner you consolidate or refinance student loans, the sooner you’ll be able to achieve your goals.

And as always, if you have any questions or want advice tailored to your specific situation, you can always reach out to our award-winning customer service team by phone at 202.524.1115, email at info@purefy.com, text at 202.688.5572, or web chat.