Student Loan Consolidation and Refinancing: Pros and Cons

Loans, Student Loans
Consolidate Student Loans

There are so many choices to make when you take out student loans: big loan or small loan, federal or private, co-signer or no co-signer.

You’ve got just as many choices when it’s time to repay your loans. If you’re deciding between federal student loan consolidation and refinancing, it’s important to understand the differences before choosing which makes the most sense for you.

Here’s a quick breakdown:

Federal loan consolidation Student loan refinancing
– Access to income-driven repayment plans
– Access to Public Service Loan Forgiveness
– Lower interest rate
– Potentially shorter repayment term
– Potentially higher interest payments
– Loss of Perkins loan forgiveness
– Not available to those with fair or poor credit
– Loss of federal loan protections

Learn more about the two types of student loan consolidation to see whether one is right for you.

[Skip to refinancing]

Option 1: Federal student loan consolidation

This option is available only for federal student loans. The government combines your separate loans into a direct consolidation loan, and it assigns you a 10- to 30-year repayment term based on your total balance. Your interest rate is a weighted average of your previous rates, so it’s not determined by your financial history. Certain loan types that aren’t otherwise eligible for loan forgiveness and income-driven repayment become eligible as a result of consolidation.


Access to income-driven repayment plans: If you’re having trouble affording your student loan bill, consider repaying your loans on an income-driven plan. That means your payments will be tied to your earnings and your loan balance will be forgiven after 20 or 25 years. Only federal direct loans qualify, so consolidating certain other types of loans into a direct consolidation loan will let you repay them on one of these plans.

Access to Public Service Loan Forgiveness: The same is true if you plan to apply for Public Service Loan Forgiveness. The program will dissolve your remaining federal loan balance after you make 120 payments while working in a public service job. But only direct loans qualify, so you can consolidate Federal Family Education Loans or Perkins loans into a direct consolidation loan to participate (read on for important caveats to consolidating Perkins loans).


Potentially higher interest payments: Your new loan term could be longer than your individual loans’ repayment schedules. If you have $10,000 to $19,999 in combined federal loans, for instance, you’ll automatically receive a 15-year repayment term on a direct consolidation loan. That means you’ll pay more in interest than if you’d paid off all your loans in the standard 10-year time frame. You can always pay off your loans faster if you want to, though, and it’s less of a concern if you’re consolidating in order to qualify for an income-driven plan (since your loans will be forgiven eventually).

Loss of Perkins loan forgiveness: Perkins loans come with their own loan cancellation programs for teachers and other public service employees. You’ll lose those benefits if you consolidate Perkins loans into a direct consolidation loan. Consider keeping Perkins loans separate when you consolidate if you plan to take advantage of loan cancellation.

It’s always free to consolidate your loans with the government on Steer clear of any company that charges a fee to consolidate them for you. Learn how to spot a student loan scam.

Option 2: Student loan refinancing

This option is available for private and federal student loans. It is when a lender pays off your existing loans and issues you a new private loan. NerdWallet refers to this process as “student loan refinancing,” but you may also see it referred to as “private consolidation” or even “consolidation.”

Private loans are credit-based, so your credit history will dictate your new interest rate when you refinance. The higher your credit score, the lower the interest rate you’ll get. You can consolidate both federal and private loans, but your federal loans will no longer be owned by the government when the process is complete.


Lower interest rate: Depending on the year you first borrowed, you could be paying as much as 6.8% in interest on undergraduate federal loans and 8.5% on Graduate PLUS loans. Private loan interest rates can be even higher. Interest rates offered by lenders through NerdWallet’s partner Credible start at 3.5% for a fixed-rate loan and 2.13% for a variable-rate loan, including 0.25% discounts for autopay. (Variable rates are riskier because they could rise according to market conditions.)

Potentially shorter repayment term: Most lenders give you the option to choose a repayment term between five and 20 years, compared with the federal 10-year plan. The longer the term, the more interest you’ll owe. When you consolidate, you’ll save the most money if you pay off your loans on the shortest repayment plan you can manage. That’s a particularly good idea with a variable interest rate.

“If you’re thinking you’re going to pay these off quickly, like in five years, going with a variable [interest rate] isn’t as much of a risk as if you were on a long-term repayment schedule,” says Jill Stone, director of financial aid at Yale Law School.

But in the end, it comes down to personal preference, she says. “If you’re the kind of person that’s really debt-averse and really risk-averse, you want the fixed interest rate even though that’s going to cost you more money over the long term.”


Not available to those with fair or poor credit: Borrowers with a credit score of 690 or above are most likely to receive competitive offers from lenders. If your credit score is lower, you have two options. You can improve your credit score and refinance later, or you can use a co-signer. Your co-signer will be responsible for your new loan if you can’t repay it.

Loss of federal loan protections: Since your new loan will be issued by a private lender, you won’t be able to repay your loans on an income-driven plan or receive forgiveness through Public Service Loan Forgiveness or Perkins loan cancellation. You also can’t take advantage of the option to postpone subsidized student loan payments interest-free, which is known as deferment. Instead, you can opt to consolidate only private loans, or you can choose a lender that offers payment postponement options.

How to consolidate


Apply for a direct consolidation loan online by logging in to with your Federal Student Aid ID. Click on “Complete a Consolidation Loan Application and Promissory Note.” Make sure you’ve decided on a student loan repayment plan and a student loan servicer you’d like to work with; you have the option to choose each on the application.

This step-by-step guide will walk you through the process.


You can apply to lenders individually or compare multiple offers through NerdWallet’s partner, Credible.

Follow the link below to fill out a brief form on Credible’s website. If you qualify, you’ll get immediate, personalized offers from multiple lenders without affecting your credit. If you continue with the process, the lender you choose will perform a credit check later on.

Brianna McGurran is a staff writer at NerdWallet. Email: Twitter: @briannamcscribe.

This article has been updated. It was originally published on April 13, 2013.

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