Student Loan Consolidation vs Refinancing Student Loans

Ben Luthi
Parent PLUS Loan
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 trying to decide between student loan consolidation vs refinancing.

While the two terms are similar to other types of debt, they’re completely different paths you can take when it comes to 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.

Overview: Student loan consolidation vs refinancing

Both student loan consolidation and refinancing start with student debt that could be restructured to create a more manageable financial situation. In both consolidation and refinancing, you end up with a single loan package and one monthly payment.

As an overview, student loan consolidation is a federal government process that you apply for through the U.S. Department of Education. It allows you to combine all of your federal student loan debt into one package. The downside is you won’t save money with a consolidation. In fact, if you choose a longer repayment term, you will increase the cost of interest for your loan over time.

With student loan refinancing, you are working with a private lender who can consolidate your federal loans as well as any private loans into one combined package with a single payment.

One of the benefits of refinancing is the ability to negotiate a better interest rate and save money over the long run — often times, a substantial amount. The downside of refinancing is the loss of federal programs like income-based repayment plans and loan forgiveness plans which are only available through the federal loan program.

Let’s get into the specifics of student loan consolidation vs refinancing!

What does it mean to consolidate student loans?

Student loan consolidation usually refers to a federal Direct Consolidation Loan, which is a program provided by the U.S. Department of Education. This type of loan consolidation is 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 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, one of the benefits of consolidating student loans is that by combining defaulted federal loans, you 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.

Benefits of consolidating student loans

So, why choose student loan consolidation vs refinancing? One of the major benefits of consolidating student loans is that with federal Direct Consolidation Loans you have the ability to consolidate — or combine — your student loans together.

By combining your student loans, your debt will become streamlined. Instead of multiple due dates and payment amounts, you’ll have just one bill to remember each month. One payment is typically much easier to stay on top of than a pile of various bills, and your goal should be to never miss a payment. Your credit score will thank you.

Plus, all your debt will also be consolidated under one student loan servicer. If you have a question or concern, you’ll have just a single number to call — a much better scenario than being on the phone all day with a handful of companies.

The primary drawback of consolidating student loans, however, is the fact that only federal student loans can qualify. If you want to combine your debt but also have private student loans in the equation, you’ll have to seek another strategy such as student loan refinancing.

Outside of that when considering consolidation vs refinancing student loans, student loan consolidation doesn’t give you the advantage of saving money on interest like student loan refinancing. With consolidation, all your student loan interest rates are averaged together and rounded up to the nearest percent — meaning you could actually end up paying slightly more in interest over the life of your new loan.

Who should consolidate student loans?

Federal loan consolidation is a good strategy if your goal is to combine multiple federal loans and to get monthly payments that are lower. It can also be a good idea if you have a low credit score or are working to improve your income prospects before approaching private lenders about refinancing.

Consolidation allows you to make changes now with the intention of refinancing to a lower rate once you are better situated.

Consolidating student loans works well for people who have a lot of different lenders with numerous federal loans. It is a good way to streamline your federal student debt portfolio into one simple monthly payment.

It also works well if you want to extend your term length and minimize your monthly payment amount. Federal consolidation allows you to extend your repayment terms based on total debt owed, so if you owe between $20,000 and $39,999, you can draw out your term on your new consolidated loan to 20 years. And for $60,000 and above, you can extend your term out to 30 years.

What does it mean to refinance student loans?

It’s important to understand the difference between student loan refinancing vs consolidating student loans.

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 a variety of 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 who has great credit and income to improve your chances. And most refinance companies allow what’s called a co-signer release. This release allows your co-signer to hand full responsibility over to you once you have a history of on-time payments (usually 12 months).

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 lenient 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.

Benefits of refinancing student loans

With student loan refinancing, you can consolidate federal student loans, private student loans, or a combination of both. And when you refinance student loans, you can save money with a lower rate, pay off student debt faster, choose a lower monthly payment, or pick a blend of repayment strategies.

What does that mean for you when trying to decide between student loan consolidation vs refinancing? Depending on your personal student loan payoff goals, refinancing student loans allows you to customize your refinance loan to match your needs.

Below are the three most popular benefits of refinancing student loans:

  • Saving money: Student loan refinancing gives applicants the chance to qualify for a lower interest rate than they currently have. And a lower interest rate means big savings — both month-to-month on your bills and over the long-term payoff of your debt.
  • Paying off student debt faster: With refinancing, you can select a shorter repayment term that will allow you to get rid of student loans more quickly — while paying much less in total interest costs. Plus, most private refinance lenders reserve their lowest rate offers for borrowers who choose shorter terms.
  • Getting a lower monthly payment: By choosing a longer-term when you refinance, you’ll be able to drastically decrease your monthly student loan bills. Some lenders offer terms as high as 20 years — so if money is tight, refinancing can help you create more room in your budget.

Beyond those three big benefits, there are plenty of other great reasons to refinance student loans:

  • Consolidate and simplify student loan payments
  • Get a lender with better customer service
  • Choose a variable or fixed interest rate
  • Remove a cosigner from your loan
  • Transfer Parent PLUS Loans to a child

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Who should refinance student loans?

If you have great credit and a strong income, refinancing could be the optimal solution.

With low-interest rates available, you can save money on your refinanced loan while combining your loans into one easy payment. You also have the freedom to choose a longer or shorter repayment plan which can work to your advantage depending on your long-term goals.

While everyone’s financial situation is unique, refinancing is a way to get the loan terms that work for your future. Refinancing offers the ability to shorten your loan term so that you can pay your debt off sooner and put your money towards important life goals. It also allows you to choose a longer-term (often up to 25 years) so that you have smaller payments and more flexibility in your monthly budget.

If you are someone who wants continued access to the federal loan benefits, including repayment plans and federal deferral and forbearance plans, refinancing may not be a good option for you.

You can also refinance consolidated student loans

Have you already consolidated your federal student loans through a Direct Consolidation Loan? You may be wondering: Can you refinance student loans after consolidation?

Don’t worry — you can still refinance student loans already consolidated with an opportunity to get a lower rate and save money.

Maybe you’ve already consolidated your federal loans and would like a lower rate, or maybe you also have private student loans that you’d like to combine. No matter your situation, it’s possible to refinance consolidated student loans.

If you’re now in a better place financially — meaning your credit score is high and your income is steady — you may be able to qualify for a lower interest rate through student loan refinancing.

Since federal loan consolidation doesn’t give you the ability to get a lower rate, choosing to refinance consolidated federal student loans could be your chance to save money. Or, if you’d like to pursue a shorter or longer repayment term, refinancing can help with that, too.

Ready to learn how to refinance a consolidated student loan? Read on to understand how to compare refinance lenders and rates so you can get the best possible deal.

Why refinancing student loans is better than consolidation

You know your financial situation better than anyone. If you are comfortable with foregoing the federal benefits associated with repayment and deferment, the answer may be straightforward.

When you compare the two options side by side, refinancing has the clear advantage of saving money through lower interest rates. In fact, the savings can be substantial with refinancing — consider this:

 Total Debt OwedInterest RateLoan TermsMonthly PaymentTotal Interest
Original Loan$35,0006.5%10 yrs$397.42$12,690
Consolidation w/ longer term$35,0006.58%20 yrs$262.60$28,024
Refinance w/ lower interest$35,0003%10 yrs337.96$5,556

Refinancing also has the flexibility of selecting either longer or shorter terms based on your personal financial goals. When consolidating federal loans, your options are far more limited based on the total dollar amount you owe.

Also, with consolidation, you are combining only your federal loans. If you have private loans, those cannot be included and need to be consolidated separately or refinanced through a private lender. With a refinancing, you can include all of your outstanding student loans.

However, if you need some time to get your financial house in order, e.g., improve your credit score, repair your credit report, or increase your income, consolidation can be viewed as an interim measure. It can allow you to simplify your student loan debt before obtaining a full refinance.

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 Compare Rates 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.

How to get the lowest student loan refinance rates

Why refinance student loans — when you refinance your student loan debt, you are taking one or more loans (federal and/or private) and presenting them to a qualified lender, and asking them to consider you for a new, or refinanced, loan.

That lender will gather information about your creditworthiness, including your personal demographic details, credit score, information about your degree and what school you attended. Then they will present you their offer which will include a fixed or variable interest rate and loan terms for payoff. The process is complicated by the sheer number of student loan lenders interested in your business. It could take hours to visit every website or call every company to get their best offer.

Instead, when you use Purefy’s Compare Rate tool, you have a 100% secure way with zero fees to access actual prequalified rate quotes from multiple lenders based on your circumstances.

Now instead of spending the time to do research on each individual company, you can fill out a few details and within 15 seconds have multiple quotes from industry-leading private student loan lenders eager to do business. With quotes in hand, you can take time to review their rates and terms and select the loan package that fits your criteria without pressure.

Consolidating vs refinancing student loans: Which should you choose?

After debating your options, you may be ready to decide between consolidating vs refinancing student loans.

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 choose between refinancing student loans vs consolidation, 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.

Key Takeaways:

  • Student loan consolidation combines multiple federal loans into a single loan, and the new interest rate will be the weighted average of the loans you consolidate
  • Student loan refinancing combines any student loans (private or federal) into a single loan, often with a lower rate and more favorable terms
  • Refinancing may be the better option if you have good credit and your goal is saving money
  • Consolidation may be the better option if you wish to keep your federal loan benefits

Next Steps

If you’re still not sure between refinancing student loans vs consolidation, 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 select refinancing vs consolidation student loans, the sooner you’ll be able to achieve your goals.

Then take a minute and fill out the Purefy Compare Rates tool and see where you are. Remember, there is no impact on your credit history until you actually apply with a lender. The Compare Rates tool only pulls a soft credit check to ensure an accurate set of quotes.

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 [email protected], or text at 202.688.5572.

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ELFI Rate Disclosure

4 ELFI Rate Disclosure:

Education Loan Finance is a nationwide student loan debt consolidation and refinance program offered by Tennessee based SouthEast Bank. ELFI is designed to assist borrowers through consolidating and refinancing loans into one single loan that effectively lowers your cost of education debt and/or makes repayment very simple. Subject to credit approval. See Terms & Conditions. Interest rates current as of 01/01/2023. The interest rate and monthly payment for a variable rate loan may increase after closing, but will never exceed 9.95% APR. Interest rates may be different from the rates shown above and will be based on the term of your loan, your financial history, and other factors, including your cosigner’s (if any) financial history. For example, a 10-year loan with a fixed rate of 6% would have 120 payments of $11.00 per $1,000 borrowed. Rates are subject to change.

SoFi Rate Disclosure

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Fixed rates range from 4.49% APR to 8.99% APR with a 0.25% autopay discount. Variable rates from 5.09% APR to 8.99% APR with a 0.25% autopay discount. Unless required to be lower to comply with applicable law, Variable Interest rates on 5-, 7-, and 10-year terms are capped at 8.95% APR; 15- and 20-year terms are capped at 9.95% APR. Your actual rate will be within the range of rates listed above and will depend on the term you select, evaluation of your creditworthiness, income, presence of a co-signer and a variety of other factors. Lowest rates reserved for the most creditworthy borrowers. For the SoFi variable-rate product, the variable interest rate for a given month is derived by adding a margin to the 30-day average SOFR index, published two business days preceding such calendar month, rounded up to the nearest one hundredth of one percent (0.01% or 0.0001). APRs for variable-rate loans may increase after origination if the SOFR index increases. The SoFi 0.25% autopay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. This benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. The benefit lowers your interest rate but does not change the amount of your monthly payment. This benefit is suspended during periods of deferment and forbearance. Autopay is not required to receive a loan from SoFi.

Earnest Rate Disclosure

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Actual rate and available repayment terms will vary based on your income. Fixed rates range from 4.72% APR to 9.24% APR (excludes 0.25% Auto Pay discount). Variable rates range from 4.39% APR to 9.19% APR (excludes 0.25% Auto Pay discount). Earnest variable interest rate student loan refinance loans are based on a publicly available index, the 30-day Average Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York. The variable rate is based on the rate published on the 25th day, or the next business day, of the preceding calendar month, rounded to the nearest hundredth of a percent. The rate will not increase more than once per month. The maximum rate for your loan is 8.95% if your loan term is 10 years or less. For loan terms of more than 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95%. Please note, we are not able to offer variable rate loans in AK, IL, MN, NH, OH, TN, and TX. Our lowest rates are only available for our most credit qualified borrowers and contain our .25% auto pay discount from a checking or savings account.

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Fixed Rate Loan Terms: 5 years/60 monthly payments, 7 years/84 monthly payments, 10 years/120 monthly payments, 15 years/180 monthly payments, or 20 years/240 monthly payments. Annual Percentage Rate [APR] is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. This rate is expressed as an APR. Fixed APRs range from 6.94% to 11.58% APR [low to high range with 0.25% auto-debit rate reduction]. Rates are subject to change without notice. Fixed rates will not change during the term. Since there are no fees associated with this loan offer, the APR is the same percentage as the actual interest rate of the loan including a 0.25% auto-debit rate reduction. These rates are subject to additional terms and conditions, and rates are subject to change at any time without notice. All estimates are based on information provided by you and are for informational purposes only, accuracy is not guaranteed and may not reflect actual rates or savings and do not constitute an offer of credit. Your actual rate, payment and savings may be different based on credit history, actual interest rate, loan amount, and term, including your cosigner [if applicable]. If applying with a cosigner, we use the higher credit score between the borrower and the cosigner for approval purposes. All loans are subject to credit approval.

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