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Student Loan Smarts: Consolidation vs. Refinancing

Posted by & filed under Featured Posts, Student Loans.

student-loan-refinancingTo consolidate or refinance student loans; that is the question.  Which begs two, much more important questions: What’s the difference between these options, and how do you know which one (if either) is right for you?

This can be a confusing topic, especially since these terms are sometimes used interchangeably.  In fact, the word “consolidation” actually has different implications depending on whether it’s a federal or private lender offering the service.  That’s why it’s important to get acquainted with each of these options before deciding what’s right for you.  Here’s a quick primer:

Federal loan consolidation
As its name suggests, consolidating implies combining multiple student loans into just one loan.  Federal loan consolidation is offered by the government and is available for most types of federal loans – but no private loans allowed.

This option generally doesn’t save you any money, since you’re simply charged the weighted average interest rate of the loans being combined.  But there are still a few potential benefits, such as:

  • Fewer bills and payments to keep track of each month.
  • The ability to switch out older, variable rate federal loans for one fixed rate loan, which could protect you from having to pay higher rates in the future should interest rates go up.
  • Lower monthly payments.  But beware – this is usually a result of lengthening your payment term, which means you’ll actually have to pay more interest over the life of the loan.

Private loan consolidation
Similar to federal consolidation, a private consolidation loan allows a borrower to combine multiple loans into one and can offer the potential benefits listed above.  However, the interest rate you receive is not a weighted average of your existing loans’ rates.  Instead, a private lender will typically use your credit score and other relevant financial information to give you a new interest rate on your consolidation loan, then use that loan to pay off your other loans.

Essentially, if you’re consolidating loans with a private lender, you are also in fact refinancing those loans.

Student loan refinancing
As we just established, refinancing is when you apply for a loan under new terms and use that loan to pay off one or more existing student loans.  If your financial situation and credit score have improved since you first took out your loans, you may be able to refinance them at a lower interest rate, which can potentially allow you to:

  • Lower your monthly payment.
  • Reduce the time it takes to pay off your loan.
  • Reduce the total amount you spend paying back your loan.
  • Choose a variable interest rate loan, which can be a cost-saving option if you plan to pay off your loan relatively quickly.
  • Enjoy the benefits of consolidation (e.g. one simplified monthly bill).

Unlike consolidation, refinancing is only available from private lenders, and a common misconception is that it’s only available for private student loans. But while most private lenders won’t allow you to combine federal loans with your private ones, SoFi is actually focused on allowing borrowers to do just that.

As to whether you should combine federal and private loans, the answer depends on your situation.  Some federal loans offer certain benefits and protections (such as Public Service Loan Forgiveness or Income Based Repayment) that do not transfer to private lenders.  If you’re considering refinancing, you should first take a look at your federal loans to see if any of these benefits apply to you.

If you don’t anticipate needing or qualifying for federal loan benefits, getting a lower rate is the next important thing.  For example, many borrowers come to SoFi to refinance high interest rate unsubsidized Direct Loans and Graduate PLUS loans.  The average SoFi borrower saves $11,783.*

So should you consolidate or refinance, or neither?  Now that you know how the two options compare, you’ll be better equipped to answer that question.


*Savings calculation is based on SoFi borrowers who refinanced between 5/21/14 and 7/2/14. Prior to refinancing, these borrowers had on average a $71,000 loan balance, a rate of 7.07% and a lifetime payment of $99,239, assuming the standard Direct Loan term. After refinancing, these borrowers have an average lifetime payment of $87,456 based on a weighted average of new rates received across both types (fixed and variable) and all terms offered by SoFi with AutoPay. Savings calculations assumes borrowers make all payments in a timely manner and do not prepay.


2 thoughts on “Student Loan Smarts: Consolidation vs. Refinancing

  1. Megan Slawinski says:

    I’m looking into lowering my monthly payments and was curious about my options…through refinancing or consolidating is there a way to combine private and federal loans together so I’m making one payment each month?

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