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

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.

What Is Student Loan Refinancing?

Now let’s switch gears and cover refinancing. Refinancing is when a new loan with a reduced interest rate is used to pay off one or more existing student loans. It’s available only from private lenders, not the federal government.

So, just to recap, consolidation is only offered from the federal government for multiple federal student loans. And refinancing one or more student loans is only offered by private lenders—they may even allow you to refinance both federal and private loans together.

Unlike with a federal consolidation, a private lender doesn’t offer an interest rate that’s a weighted average of your old rates. They offer rates based on your credit history and finances. If your situation has improved since you took out a private loan or if interest rates have gone down, you’re likely to get a lower rate and save money.

Optimizing your debt by getting a lower interest rate and reduced monthly payments is the major benefit of refinancing. You may even choose a shorter repayment term, which could significantly cut the amount of interest you pay.

But the downside of refinancing a federal loan is that you lose all the benefits that come with it, such as income-based repayment plans and deferment. Depending on your financial situation, that may be less important than getting a lower interest rate.

See also: Debt Q&A: Managing Student Loans, Credit Cards, and HELOCs Wisely

Optimizing your debt by getting a lower interest rate and reduced monthly payments is the major benefit of refinancing.

Should You Refinance or Consolidate Your Student Loans?

Whether you should refinance or consolidate your student loans depends on what you’d like to achieve and how you answer questions like:

  • Do I have private or federal student loans? 
  • Do I qualify to refinance at a lower interest rate? 
  • Do I believe that I'll need the benefits that come with my federal loans?

If you have federal loans, doing a consolidation isn’t as risky as refinancing them into a private loan. For instance, if you work in public service or any field that allows federal loans to be forgiven after 10 years, you would lose that option with a private lender. Always evaluate the pros and cons carefully before moving a federal loan to a private lender.

If you have private loans, it’s always wise to shop for a lower interest rate. Each lender will evaluate you differently, so use a site like Credible to compare multiple offers. There’s nothing to lose, especially if there are low or no fees charged.

If you’re really struggling to pay your federal student loans, consolidation is probably a wise move. But if your finances and credit are in good shape, refinancing federal and private loans for a lower interest rate or shorter term will help you pay them off faster.

See also: The 8 Cheapest Ways to Pay Off Your Student Loans


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.