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Differences Between Refinancing and Consolidating Student Loans

If you’re comparing student loan consolidation to refinancing, both may be appropriate choices for you (as long as you understand the distinctions).

Consolidation is a good method to take a long-term approach, since It combines numerous federal loans into a new federal loan, allowing you to make a single payment or participate in government programs.

Refinancing a student loan is the greatest option to save money. The new private student loan replaces one or more existing federal or private loans with a lower-interest-rate loan.

There are various factors to consider when deciding whether or not to consolidate or refinance your student debts.

Here’s everything you need to know about each option, eligibility, as well as how to pick which one is best for you.

Differences Between Refinancing and Consolidating Student Loans

Consolidating your student loans is a government procedure. Private consolidation, or student loan refinancing, is accomplished via private lenders.

To apply for federal loan consolidation, go to the Federal Student Aid website.

Only federal student loans are eligible for consolidation, and you may choose it if you meet the requirements.

While refinancing your student loans with a private loan entails the lender’s permission.

Lenders will look at your credit history and debt-to-income ratio when deciding whether or not to offer you a new loan.

Here are the main distinctions between consolidation and refinancing:

Student loan refinancingStudent loan consolidation
Can I lower my rates?YesNo
Is it possible to utilize federal benefits, repayment alternatives, and forgiveness options?NoYes
Will I pay just one monthly bill?YesYes
Which loans can I combine?Private and federal loansFederal loans only
Can I save money?YesNo. Consolidation might decrease your payments, but the interest rate will rise.

Use our student loan refinancing calculator to calculate how much money you’ll save by refinancing your student debt.

Student loan refinance calculator

Step 1: Know what you owe

How much can refinancing save? Enter details of your existing loan

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Step 2: Estimate your new rate

The better your credit, the lower the rate you’ll likely get. If you have bad credit, the best thing you could do is using a co-signer

Fixed APR: 2.15% – 5.85%. Variable APR: 1.80% – 5.28%. + ($500 Gift)

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Fixed APR: 1.99-5.79%. Variable APR: 1.74% to 8.27%

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Fixed APR: 2.49-7.04%. Variable APR: 1.98-7.14%

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Fixed APR: 2.69-7.93%. Variable APR: 2.05-5.25%. Min. credit score: 660.

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Step 3: Know how much you could save

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More: Can I Refinance Student Loans During My Grace Period?

1. Consolidation and Refinancing Eligibility

Consolidation Eligibility

Only federal student loans, such as Federal Stafford Loans, Federal Grad PLUS Loans, Federal Parent PLUS Loans, and Federal Perkins Loans, can be consolidated using a consolidation loan.

On all the loans being consolidated, the borrower must be the same.

More than a third of government student loan dollars are invested in consolidation loans to more than a fifth of federal student loan customers.

Refinancing Eligibility

Only private lenders offer refinances.

When you refinance federal student loans into a private loan, keep in mind that the new loan will not have the enhanced benefits and protections of federal loans.

Fixed rates, flexible repayment options, longer deferrals and forbearance, death and disability discharges, and loan forgiveness programs are just a few of the benefits.

2. Consolidation and Student Loan Refinancing Repayment

Consolidation Repayment

The average term for federal student loan consolidation is 10 years. income-driven repayment programs such as PAYE or REPAYE can extend your repayment period to 20 or 25 years.

Refinancing Repayment

Student loan refinancing allows borrowers to take out a new student loan with different terms than their previous one to reduce monthly payments.

The most frequent student loan refinancing duration choices are 5, 7, 10, 15, and 20 years.

If you want to get your student loan payments done as soon as feasible, a shorter repayment period is the way to go.

If you want to pay off your student debts more slowly, you may take out a longer-term loan.

A shorter repayment period means larger monthly payments; reduced interest; faster student loan repayment.

A longer repayment period means lower monthly payments; more interest; slower student loan repayment

You may also like: Debt-To-Income Ratio Student Loan Refinancing

When Is It Better To Consolidate Instead of Refinancing?

In many cases, however, consolidation is the superior alternative:

  • You aren’t eligible for a federal benefit: The majority of income-driven repayment arrangements and loan forgiveness programs are only available to federal direct loans. You can convert your Federal Family Education Loan debt to a direct consolidation loan to take advantage of those choices.
  • You’re looking for a new loan servicer at the federal level: The government will provide your student loans with service. If you don’t like the customer care that is provided, you can move your federal loans to a different company.
  • You’ve got a lot on your plate: If you took out multiple federal loans for more than one year at school, you’ll have to deal with many payments, interest rates, duration, and loan servicer struggles. You’d just have to deal with one monthly obligation.

When Is It Better To Refinance Instead of Consolidating?

If you’re trying to save money. Consolidating your federal loans will not reduce your interest rate.

Private lenders may provide you with an interest rate that is based on your financial situation.

The majority of private lenders refinance both federal and private loans.

When it comes to refinancing federal loans, caution is advised since you’ll lose access to things like income-driven plans and loan forgiveness programs.

Private loans don’t provide the same perks, so private loan refinancing is strongly advised if at all possible (even %1 cheaper).

The weighted average of the rates of your consolidating loans will be used to determine your new rate.

You may also like: Refinance My Home to Pay Off Student Loans: Is It Make Sense?

Can You Refinance Student Loans After Consolidation?

Yes, student loans can be refinanced after consolidation. You may refinance your student debt if you consolidated existing student loans.

You are not required to pay any fees when refinancing student loans, and there is no prepayment penalty. There is also no such thing as a maximum number of times you may refinance your student debt.

Frequently Asked Questions