Should you do Student Loan Consolidation or Student Loan Refinancing?

Choosing between student loan consolidation and student loan refinancing is contingent upon your goals. Whatever your goals, both options offer unique benefits that should be considered before moving forward.

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Written By: James Lambridis, Founder/CEO DebtMD

Student loans have not just become a common occurrence in the United States, but more so a way of life for students looking to pursue a college degree and the career path of their choice. For those who aren’t able to pay their way through school, which is a tall task, student loans become a necessity. According to Make Lemonade, the latest student loan statistics show that there are more than 44 million borrowers who collectively owe $1.5 trillion in student loan debt. Upon graduation, many recent graduates are hampered by high interest rates and even higher monthly payments, and are not sure how to pay these obligations off in a timely manner. For people looking to accelerate the payoff of their student loans, there are two options, student loan consolidation and student loan refinancing, that accomplish just that. There are many common misconceptions when it comes to consolidating or refinancing student loans, and if you do not know the differences between the two, you can end up making a costly mistake. DebtMD will help you distinguish between each option, along with the pros and cons, so that you can make an informed decision if you are looking into either.

Choosing between student loan consolidation and student loan refinancing is contingent upon your goals. Are you looking to lower your monthly payment? Do you want to pay off your student loans as quickly as possible? Perhaps you just want a lower interest rate. Whatever it may be, both options offer unique benefits that should be considered before moving forward.

Student Loan Consolidation

Student loan consolidation combines multiple federal student loans into one new loan with one monthly payment. Keep in mind that with this option, you are only allowed to consolidate FEDERAL loans, so if you have private loans, you will need to look elsewhere. By doing a student loan consolidation, you are able to lower your monthly payment, however your interest rate will remain the same. This in turn will stretch your term out longer, making you pay more in interest in the long run assuming you do not pay off the loan early. One key benefit of student loan consolidation is that you will still have access to federal protections and forgiveness programs. You also have the ability to switch from a variable interest rate to a fixed rate. The following are the different types of federal loans that are eligible for a Direct Loan Consolidation:

  • Federal Direct Subsidized Stafford / Direct Loans
  • Federal Direct Unsubsidized Stafford / Direct Loans
  • Federal Direct PLUS Loans
  • Federal Direct Consolidation Loans
  • Federal Family Education Loans (FFEL)

By consolidating your federal student loans, you are also able to participate in income-driven repayment plans such as PAYE, REPAYE, IBR, or ICR. In addition, you remain eligible for student loan deferral and forbearance.

Student Loan Refinancing

Student loan refinancing, on the other hand, combines multiple private and/or federal loans into one new private loan. The major distinction with refinancing is that you are able to include private, not just federal loans. This option gives you the ability to lower your interest rate, not just your monthly payment. One drawback, however, is if you refinance your student loans, you are no longer eligible for any federal benefits or programs. You also have the option of opting for a variable rate loan, as opposed to a fix rate. Variable rates are typically lower than fixed rates, but do come with the risk of increasing. Variable rates are best for people who plan on paying off their loans before the end of the term and aren’t concerned with a future rise in interest rates. If you are someone with a steady income and an above average credit score, student loan refinancing is probably the best option for you. It is also a great option for people who want the flexibility of a fixed or variable interest rate and who don’t plan on using public service forgiveness or income-driven repayment plans.

Can you refinance student loans after consolidation?

Yes, you can refinance student loans after consolidation. If you already consolidated student loans, you can refinance student loans. There are no fees to refinance student loans and no prepayment penalty. There is also no limit to how often you can refinance student loans.

Is Consolidation Or Refinancing Better?

In the end, the decision whether to consolidate or refinance your student loans should be assessed on an individual basis. Everyone’s situation is unique, so one option is not necessarily better than the other. It is imperative to know the implications of each option and how each will affect your finances. Here's a quick summary to help you make a more informed decision:

Consolidation: organizational tool, lower monthly payment, same or slightly higher interest rate; access to federal repayment plans

Refinancing: organizational tool; lower interest rate; flexibility; save money; pay off student loans faster

Bottom Line: Deciding whether to consolidate or refinance your student loans comes down to your own unique financial situation; specifically your income as well as your financial goals. If you’re okay with it taking a little longer to pay off your student loans, consider consolidating them. If you wish to accelerate your payoff and are fine with paying a little more each month, go with refinancing. In the end, both options are great ways to save money and simplify your finances.

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