Student Loan Options: What is Refinancing vs. Consolidation?

To consolidate or refinance student loans; that is the question. Which begs three, much more important questions: What is refinancing, what is consolidation, and how do you know which option (if either) is right for you?

This can be a confusing topic, especially since these terms are sometimes used interchangeably. In fact, the definition of “consolidation”, as well the implications, actually differ depending on whether it’s a federal or private lender offering the service. That’s why it’s important to get acquainted with all of your student loan 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:

1. Fewer bills and payments to keep track of each month.

2. 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.

3. 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 take a look at your history of dealing with debt and 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 student 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 has improved since you first took out your loans, you may be able to refinance student loans at a lower interest rate, which can potentially allow you to:

1. Lower your monthly payment.

2. Reduce the time it takes to pay off your loan.

3. Spend less money paying back your loan.

4. Choose a variable interest rate loan, which can be a cost-saving option if you plan to pay off your loan relatively quickly.

5. 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 allows borrowers to do just that.

As to whether you should combine federal and private loans, the answer depends on your situation. Federal loans offer certain benefits and protections (such as Public Service Loan Forgiveness and income-driven repayment plans) 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 can save you a significant sum.  For example, the average SoFi borrower saves about $14k1.

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


Editor’s Note: This is an updated version of a post we originally published in November 2013. We welcome new comments and questions below.



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ABOUT Dan Macklin Twitter:@macklindan Dan Macklin is a co-founder of SoFi and VP of Community & Member Success with responsibility for maximizing the overall experience for SoFi’s growing community of members. Dan holds an M.S., Management degree from the Stanford Graduate School of Business where he was a Sloan Fellow. He also holds a B.A. in Business Economics from University of Durham in England.

23 thoughts on “Student Loan Options: What is Refinancing vs. Consolidation?

  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?

  2. I have a private student loan from aessuccess-
    I do not like how they have been handling my account – can Sofi buy my private loan – so I can make payments with Sofi???

  3. Blake Rowell says:

    Anna – I have a loan with ACS that was consolidated at 8.5% in 2001. I understand that because it was already consolidated once, I can’t do that again. But, is it possible to go to another lender for a lower interest rate? If not, do you know of any way I can get the interest rate down?

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  10. I currently have loans through 2 lenders. I have been using the IBR for both. I am interested in combining loans and have having to worry that my payment will go up considerably every year and not having to deal with the lengthy IBR applications every year. Can SoFi help me?

    • Hi Mel,

      Thanks for your comments and for reading out blog post! Our Loan Operations team would be happy to help answer questions about consolidating your loans and how pricing can change. Since everyone has a slightly different situation, we recommending speaking to them about qualifying for SoFi and how our processes work. You can reach them by phone at 855-456-7634, or fill out our straightforward application form here:

      Thanks again for your questions and interest in SoFi!

  11. Stephanie T. says:

    I currently have 9 individual parent plus loans and was considering consilidating/refinancing a portion of theses loans totaling approx $180k. If I reduce the total number of installment loans from 9 individual to 5 ( keeping four of the low rate plus loans + consolidating/refi remaining 5 loans ), will have any bearing on my credit score either positive or negative ?

    • Hi Stephanie,
      Thanks for reaching out to us and for reading our blog! Your question would be better answered by the credit bureaus, SoFi wouldn’t be able to opine either way on how they look at your situation and any resulting action. If you’re interested in consolidating or refinancing your loans with SoFi, check out our FAQs page or call our Customer Service team at (855) 456-SOFI

  12. I have 2 SL payments. 1 ACS, 1 Navient. I would like to consolidate.

  13. This provided great information. I have federal and private loans with Navient. With good to excellent credit, I want to lower my debt to equity ratio as I got accepted into business school and am looking at my financing options. Does it make sense to refinance the 2 private loans I have that are in repayment?

  14. private student loan consolidation lenders says:

    thaks for you help.

  15. Can you consolidate student loans and a small credit card balance?

    • Hi there –
      If you have student and credit card debt, it isn’t possible to consolidate them into one loan. However, refinancing a student loan and taking out a personal loan to cover credit card debt can be a good option. Give our loan consultants a call at 855-456-SOFI, they’d be happy to provide some guidance around your options.

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