Should You Refinance or Consolidate Your Student Loans?

Find out the difference between a student loan refinance and a consolidation, who can use them, and the best places to shop if either option is right for you.

Laura Adams, MBA
7-minute read
Episode #526

Should You Refinance or Consolidate Your Student Loans?

One of the biggest financial challenges that many graduates face is paying back their student loans. Education debts can take over your financial life and make you feel powerless. You want to make smart decisions about your debt, but sometimes the answers just aren’t clear.

Truth is, you have more control over your debt than you may think. So, if you haven’t revisited your student loan repayment strategy, it’s a good time to get familiar with the options.  

In this post, I’ll cover the difference between refinancing and consolidating your student loans. You’ll learn how these options make debt more manageable and affordable, which types of loans are eligible, and the best places to shop if either option is right for you. Plus, I’ll answer a question from a podcast listener about how to handle past due student loans.

What is Student Loan Consolidation?

Understanding consolidation and refinancing can be confusing because the terms are often used interchangeably and for different types of debt, such as credit cards and mortgages. In this post, I'll review how consolidation and refinancing applies to student loans only. 

Consolidating means combining multiple student loans into one new loan. The idea is that managing one account with one monthly payment simplifies your financial life. You’re more likely to feel overwhelmed or to inadvertently let a payment due date slip through the cracks if you’re dealing with multiple loans than if you have just one.

True consolidation is only available for loans that originally came from a government program, such as a Direct Loan, Stafford Loan, Perkins Loan, or PLUS loan.

But how you can use a consolidation depends on the types of student loans that you have. And you get different results from consolidating federal loans versus consolidating private loans.

True consolidation is only available for loans that originally came from a government program, such as a Direct Loan, Stafford Loan, Perkins Loan, or PLUS loan. The government offers a product called a Direct Consolidation Loan, which allows you to combine most types of federal student loans (but no private loans) into one new, fixed-rate loan.

The upside is that there's no cost to get a Direct Consolidation Loan. But the problem is, it generally doesn’t save money because the interest rate is fixed as a weighted average of the rates on the old loans being combined, rounded up to the nearest one-eighth of one percent.

However, consolidating can give you the option to change your repayment schedule. For example, if you have loans with 10-year repayments, you might be able to extend the consolidation term up to a maximum of 30 years.

Stretching out the length of your loan reduces the monthly payments, which can save money in the short-term. But you end up paying more interest over the life of the loan.

Your credit history and current financial situation aren’t factors for getting approved for a federal consolidation, so it’s a great option if you’re having trouble making your monthly payments. Increasing your cash flow also improves your debt-to-income ratio, which makes you more likely to get approved for other credit, such as a student loan refinance, car loan, or mortgage.

If you’re already behind on student loan payments and want to consolidate, you must either catch up by making three consecutive monthly payments first, or agree to repay your new consolidation loan according to one of several income-based repayment plan options.

Consolidation may give you access to additional repayment plan options or forgiveness programs that you didn’t have before. But it may also cause you to lose certain benefits that come with your original loans. Once your loans are paid off and you’re issued a Direct Consolidation Loan, your old loans no longer exist—so be sure to you understand what’s at stake.

Also note that you can only consolidate student loans that are in your name. Education loans taken out by your parents or spouse can’t be combined with your federal student loans.

See also: How to Build Credit With a Secured Credit Card


About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.