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Student Loan Consolidation vs. Refinancing

Federal student loan consolidation and private student loan refinancing are not the same thing.
Feb. 19, 2019
Loans, Student Loans
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When it comes to consolidation versus refinancing, student loan borrowers get confused. Even student loan experts agree that giving advice about consolidating student debt is complicated, riddled with answers including “if” and “it depends.”

“There’s a reason why borrowers are confused,” says Persis Yu, director of the National Consumer Law Center’s Student Loan Borrower Assistance Project.

Yu says the confusion starts because many borrowers don’t understand their loan types, whether they’re federal direct loans, Federal Family Education Loans (FFEL), or private loans. It persists because there are numerous reasons borrowers should or shouldn’t consider consolidating.

» MORE: How to consolidate and refinance your student loans 

Although it’s hairy, either one might be a good option for some student loan borrowers. Here’s what you need to know about the differences between consolidation and refinancing and how to decide if either one is right for you.

They’re similar, but there are important distinctions

You may have heard the words “consolidation” and “refinancing” used interchangeably, but they’re actually two distinct repayment options. Consolidation typically refers to bundling multiple federal loans into one through the federal government. It can make your monthly payments simpler or give you access to more favorable repayment plans or forgiveness programs. Learn more about consolidating your student loans on the government’s student loan site

You may have heard the words ‘consolidation’ and ‘refinancing’ used interchangeably, but they’re actually two distinct repayment options.

Student loan refinancing refers to taking out a new loan — usually one with a lower interest rate — to repay one or more existing loans.

Consolidation and refinancing are essentially the same when it comes to private loans, which is why people often conflate them. That’s not the case for federal loans, but more on that below.

Here’s a breakdown of the differences between consolidation and refinancing for federal and private loans:

 Federal student loansPrivate student loans
ConsolidationFederal Direct Consolidation loanPrivate lender
RefinancingRefinance through a private lender, lose federal loan benefitsPrivate lender

Federal loan consolidation isn’t private loan consolidation

Federal loan consolidation is a government process, while private loan consolidation happens through private lenders. If you have both federal and private loans, you may want to consolidate your federal loans together and your private loans together, but it’s rarely advised to consolidate them all into one loan.

To consolidate your federal student loans, apply for a federal direct consolidation loan on the Federal Student Aid website. Keep in mind that federal loan consolidation won’t typically lower your interest rate. Direct consolidation loan interest rates are fixed and are calculated by taking a weighted average of the interest rates of the loans you’re consolidating.

Unlike federal loan consolidation, private loan consolidation involves applying for a new loan. Your prospective lenders will evaluate you largely based on your credit history and, if you qualify, make you an offer.

Some lenders will consolidate only private loans, while others — including the lenders participating in the refinancing marketplace Credible — will consolidate both federal and private loans. Through Credible, NerdWallet’s partner, you can apply to multiple lenders with a single application.

Student loan consolidation isn’t right for everyone

Federal student loan consolidation sounds great: You go from juggling multiple interest rates, terms and loan servicers to having one monthly payment. But consolidation isn’t for everyone, says Rick Ross, co-founder of the consulting firm College Financing Group.

Federal loan consolidation can be beneficial if you need to do it to access a repayment option. For example, most income-driven repayment plans and forgiveness programs require that borrowers have a federal direct loan. If you have a loan from the Federal Family Education Loan program, you’ll have to switch to a direct consolidation loan to access those options.

Federal loan consolidation can be beneficial if you need to do it to access a repayment option.

But consolidating your student loans can also cause you to pay more interest over time. Federal Direct Consolidation loan term lengths range from 10 to 30 years, depending on your loan balance. The larger your balance, the longer your term will be. While a longer term will lower your monthly payments, it will increase the amount of interest you’ll pay.

Still, even if you get a direct consolidation loan with a long term, there’s no penalty for paying it off early. You should aim to pay off your loans as fast as possible to save the most in interest.

Only private lenders offer student loan refinancing

You can refinance both federal and private student loans, but only through private lenders. Although it issues student loans, the federal government doesn’t offer student loan refinancing. Some states have created their own refinancing programs, but even those are run through private lenders.

You can refinance both federal and private student loans, but only through private lenders.

That means that no matter which route you go if you refinance a federal student loan, it will become a private loan. You’ll lose the benefits that federal loans offer, including income-driven repayment plans, forgiveness programs, and deferment and forbearance.

» MORE: Should you refinance federal student loans?

Consolidating your federal student loans is free

Federal student loan consolidation is completely free through the federal government. But there are companies that try to capitalize on the convoluted consolidation process by charging for it. That’s a red flag, Yu says.

To avoid getting involved with a crooked student loan consolidation company, don’t give out your Federal Student Aid (FSA) ID, and don’t send your loan payments to a third-party company. For more information, read about five ways to spot a student loan scam.

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