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Student loans: When to consolidate & when to refinance

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For many Americans, it's tricky to balance paying down student loan debt while saving for retirement and thinking about long-term goals. It tends to be more difficult if you have multiple student loan payments to keep track of each month. In these cases, you may want to look at how to consolidate and refinance student loans.

With either option, you'll combine multiple loans into one loan and one payment. But the strategy of whether to consolidate vs. refinance student loans will depend mainly on whether you have private or federal loans and what your goals are for the change.

Let's go through the differences between student loan consolidation and refinancing so you can make the best move for your needs.

What is student loan consolidation?

Student loan consolidation lets you combine just your federal loans into one. Instead of managing different federal student loan bills every month, you'll only need to worry about making a single payment. You can consolidate them through the federal student aid website.

Only paying one bill each month may reduce your student loan stress. However, you won't necessarily save any money or receive a lower interest rate through federal student loan consolidation. It's generally a move of convenience.

What is student loan refinancing?

Student loan refinancing also lets you combine loans from multiple lenders into one loan with one monthly payment, but your loans can be from either federal or private lenders—such as banks, credit unions, a school or a state agency. You would refinance directly with a private lender of your choice.

With student loan refinancing, you may receive a lower monthly payment and interest rate. This could be especially appealing to people with high-interest private loans. The main tradeoff is that if you're including federal loans in the refinance, you'll give up access to federal protection, repayment and forgiveness options.

At a glance: Student loan consolidation vs. student loan refinancing

Provided by
Federal government
Private lenders
Eligible loans
Only federal loans
Federal and private loans
Reduce multiple federal loans to one
Reduce multiple loans to one
Credit check
Interest rate
Fixed, weighted average across current loans
Fixed, potentially lower with good credit
Fixed payments
Why to consider it
You have multiple federal loans and want to simplify payments while maintaining access to federal benefit programs
You have a mix of loans, and you want to simplify payments while hopefully receiving a lower interest rate

Considerations for student loan consolidation

For people with federal loans, especially those who are eligible for certain federal programs, student loan consolidation could be just what's needed to simplify their debt repayment. But there are some factors to keep in mind as you think it through:

  • You won't need a credit check. You don't have to worry about your credit score or credit history affecting your eligibility for federal student loan consolidation.
  • You'll retain federal benefits. You'll keep access to the benefits of federal student loans that you're eligible for, such as income-driven repayment plans or any potential forgiveness programs.
  • You'll receive a fixed interest rate but not a lower one. Once consolidated, the loan has a fixed interest rate, so you always know what you'll pay, which can be helpful if you currently have loans with variable rates. But on the flip side, you won't secure a lower interest rate like you could by refinancing. Your new rate will likely be slightly rounded up from the weighted average of your current loan rates.
  • You may pay more interest over time. Consolidation can simplify repayment, but you may also have a longer repayment period. That could mean you'll reduce your monthly payment but may pay more in interest over time.

Considerations for student loan refinancing

Similarly, student loan refinancing isn't the right option for every scenario. These characteristics can help you decide if it's a smart course of action for you:

  • Your credit score will matter. Most lenders offering refinancing will check your credit history and score. If your credit isn't strong, you may not get the best terms or be eligible for refinancing.
  • You may receive a lower interest rate. With a strong credit score, refinancing may get you a more favorable rate, reducing your monthly payment and saving money over the life of the loan.
  • Your repayment terms could improve. You may have more flexibility with refinancing. Depending on your loan and eligibility, you may be able to reduce your interest rates or change the repayment period to fit your needs better.
  • You'll know what you need to pay each month. If you currently have variable-rate loans, refinancing can instead give you a predictable monthly rate for the life of your payment term.
  • You'll lose any federal benefits that came with your federal loans. If you're refinancing federal loans, you'll lose access to those federal student loan benefits.
  • You could face potential fees. Since refinancing goes through private lenders, you may have to pay application and organization fees on your loan. There may even be a penalty charge if you pay off the loan early.

Choosing when to consolidate or refinance student loans

When you're paying back student debt, your approach will depend on your loans, financial situation and future goals.

The biggest benefit of student loan consolidation is maintaining access to federal loan benefits, which can go a long way toward softening your repayment obligations. But if you're not eligible for those types of programs, then refinancing your federal loans with a private lender may be more worthwhile.

If you have a mix of federal and private loans and your main goal is simplifying payments, consolidation may not help you reach that goal. While you'd have only one federal loan payment, your private loans would still be separate.

You may want to consolidate if you prefer a different loan servicer. For example, if you like one of your current servicers over the others, consolidation can help you switch to the servicer you prefer.

When it comes to refinancing, private lenders may offer more attractive rates if you have a good credit score and financial history or if you've improved your credit score since taking out the loans. That may help reduce your overall interest and monthly payments, which you can put toward other savings goals.

Refinancing may also be an option if you want to fully take over your loans. For example, if your parents or others are co-signers on your loans, refinancing would let you remove them. It would also release them from the potential liability of a loan default and takes your loan off their credit report.

As you weigh these options, know that a financial advisor can help. They'll review your loans and run through the scenarios to see how the different options fit your budget, overall savings goals and broader financial plan.