Consolidate vs Refinance

What’s the difference between student loan consolidation and refinancing? And which option might work better for you? Find out below.

If you’re one of the approximately 45 million Americans who currently have student loan debt, you may have heard the terms “consolidation” or “refinancing” being thrown around. If you’re not sure what these terms mean or how they’re different, you’re in the right place.

Finance is personal and how you choose to repay your student loans is no different. While consolidation might make sense for some borrowers, and refinancing might make sense for others, these options won’t make sense for everyone. Understanding the nuances of consolidation vs. refinancing can help empower you to make financial decisions that work for you.

Part of what makes the difference between consolidation and refinancing difficult to discern is that the two terms are sometimes used interchangeably. There are important differences between them, but they do have some similarities. When boiled down to the most basic concept, consolidation and refinancing both combine or replace existing student loans into a single new loan.

The details of how each work are different, which can naturally cause some confusion. This guide aims to provide some clarity for borrowers trying to determine the difference between refinancing and consolidation. Let’s start with a breakdown of the specifics of student loan consolidation.

Student Loan Consolidation

A Direct Consolidation Loan is a loan offered through the U.S. Department of Education that allows you to combine multiple federal education loans into a single federal loan. Only federal student loans can be consolidated through a Direct Consolidation Loan. Here’s a look at some key details about the consolidation process.

  • There is no application fee to consolidate loans through a Direct Consolidation Loan.
  • The resulting interest rate is a weighted average of prior loan rates, rounded up to the nearest ⅛ of a percent.
  • If a borrower’s monthly payment decreases, it’s likely the result of lengthening the term, which can mean paying more interest over time.
  • Because the interest rate is a weighted average and not necessarily reduced, federal student loan consolidation is generally not a money-saving option.
  • If you consolidate loans other than Direct Loans, consolidation may give you access to additional income-driven repayment plan options and Public Service Loan Forgiveness (PSLF).

Consolidating student loans through a Direct Consolidation Loan might be helpful for borrowers who have a number of federal student loans with different loan servicers. Even though federal student loans are all eligible for the same repayment plans, the government contracts with several different student loan servicers.

This means that, even if you hold federal loans exclusively, you could be making payments to more than one servicer. Consolidating your student loans can help streamline your repayment, so you only have to stay on top of a single monthly bill.

Federal loans consolidated through a Direct Consolidation Loan remain federal loans. But instead of having multiple federal loans, you will now have one brand new federal loan with one interest rate, which is the average of your old federal loans combined.

When to Consider Consolidating Your Student Loans

You might consider consolidation over refinancing in these situations:

    1.    You have more than one federal loan. If you’re juggling multiple payments, rates, terms, and loan servicers, consolidation can simplify and streamline loan repayment by giving you just one monthly bill to manage.

    2.    You want to retain federal protections. Unlike with student loan refinancing, federal student loan consolidation doesn’t take away federal loan protections like deferment, forbearance, and forgiveness programs.

    3.    You need to consolidate to be eligible for a federal relief program. Most income-driven repayment and forgiveness programs are for federal Direct Loans. If you have a Federal Family Education Program or parent PLUS loan, you’ll need to switch to a Direct Consolidation Loan to access those programs.

    4.    You’re in student loan default and want to get back on track. One way to get out of default is to consolidate your defaulted federal student loan into a Direct Consolidation Loan. Just keep in mind that when you consolidate a loan, your accrued interest gets added to the principal balance. You’ll then get charged future interest on a higher balance, which could cause you to pay more overall.

How to Consolidate Student Loans

You can apply for a Direct Consolidation Loan online in as little as 30 minutes. Here’s how:

1.    Log in to studentaid.gov to access the direct consolidation loan application. Gather the documents listed in the “What do I need?” section before you start the application (you’ll need to finish it in one session).

2.    Choose which loans you do — and do not — want to consolidate.

3.    Select a repayment plan. You can choose a plan based on your loan balance or one that ties payments to income. (Note: If you pick an income-driven plan, you’ll need to fill out an income-driven repayment plan request form next.)

4.    Read the terms before submitting the form online.

5.    Keep on making your current loan payments until your servicer notifies you that the consolidation is complete.

Student Loan Refinancing

Refinancing is when you consolidate your student loans with a private lender and receive new rates and terms. The exact process can vary by lender, but the general idea is that a borrower consolidates their existing student loan debt with a new loan, and qualifying borrowers might be able to secure a lower interest rate. Here’s some more detail on the refinancing process.

  • When a private lender consolidates your student debt, what they are really doing is refinancing your loans.
  • Some private lenders will only refinance private student loans. SoFi, however, will consolidate and refinance both federal and private student loans.
  • Private lenders review a borrower’s credit score and history, in addition to other financial information, in order to determine the interest rate and terms the borrower qualifies for. Requirements may vary by lender.
  • Fees associated with refinancing your student loans are determined by lender. For example, there are no hidden fees when you refinance with SoFi.
  • Through refinancing your loans, borrowers receive a new (hopefully lower) interest rate, based on their current financial picture.
  • Borrowers with good credit and a strong financial picture could qualify for a lower interest rate and see substantial savings over the life of the loan through refinancing.
  • Refinancing federal student loans disqualifies them from federal repayment programs, including PSLF and income-driven repayment plans.
  • Borrowers who refinance federal student loans with private lenders will also lose out on federal protections like forbearance and deferment, which give qualifying borrowers the opportunity to temporarily pause payments in the event of financial hardship. Some private lenders have hardship programs in place (like SoFi, which offers unemployment protection for qualifying members), but policies will be determined by individual lenders.

Refinancing can be a solid option for some borrowers, but it won’t be the right choice for everyone. The same can be said for consolidation through a Direct Consolidation Loan. Consolidating student loans via refinancing could be a good idea for people whose financial position — in terms of employment, cash flow, credit, and other factors — has improved since they graduated from school.

Some lenders allow borrowers interested in refinancing to get a quote to see if they prequalify for a loan and give them an idea of what rates and terms are available to them. This information could help borrowers determine if they might be able to secure a lower interest rate or more favorable loan terms through refinancing.

People who are working in the public sector or taking advantage of federal debt relief programs such as income-based repayment or PSLF may not want to refinance, as these federal programs do not transfer to private refinance loans.

When to Consider Student Loan Refinancing

You might consider refinancing over consolidation in these situations:

1.    You already have private student loans. While refinancing federal loans means giving up federal benefits, you don’t have anything to lose if you are able to refinance your private student loans at a lower rate.

2.    You’re looking to save money. Federal loan consolidation won’t lower your interest rate — you’ll get the weighted average of the rates of the loans you consolidate. Private lenders will offer you an interest rate based on your (or your cosigner’s) qualifications as a borrower. That could potentially decrease your monthly payments and the amount you repay overall.

3.    You have a steady income and good or excellent credit. Refinancing private student loans can be a smart move if your credit score and income can qualify you for lower interest rates. If your credit score or income is less than ideal, you can apply with a cosigner who has a stronger financial profile.

4.    You want to change who owns the loan. You can’t consolidate federal student loans with different owners, such as ones taken out by you and ones taken out by your parents. Refinancing, however, allows you to switch who is responsible for federal loan repayment. It might also allow you to remove a cosigner from existing private loans.

How to Refinance Your Student Loans

You can refinance private or federal loans (or both). Here’s how:

1.    Research lenders. Give yourself time to shop around and compare as many student loan refinance companies as possible to find the right loan for your needs. Consider not only interest rates but also repayment terms, fees, and eligibility requirements.

2.    Get multiple interest rate offers by prequalifying. You may need to submit some basic information to prequalify, but this generally does not impact your credit score.

3.    Select your lender and loan terms. Be sure you understand your interest rate — fixed or variable — and your repayment term. These are key factors that impact your monthly payment and total cost of the loan.

4.    Complete the refinance application. Once you’ve picked a lender, you’ll need to fill out a full application and submit any required documentation, such as tax returns or pay stubs. Also be prepared to provide information about the student loans you want to refinance.

5.    Once approved, sign all required documents.You’ll keep paying your current lender until your refinance is complete.

Can You Refinance a Student Loan After Consolidation?

Yes. It’s possible to refinance your student loans even if you’ve already consolidated them with the Department of Education. Refinancing consolidated student loans could help you qualify for a lower interest rate or more beneficial loan terms. Refinancing consolidated student loans works in the same way as refinancing any other student loan.

You can refinance loans you’ve already refinanced/consolidated with a private lender as well. As long as you qualify, you can refinance your student loans as many times and as often as you’d like.


Direct Student Loan Consolidation Student Loan Refinancing
Are federal loans eligible?
Many private lenders only refinance private loans, but SoFi accepts both federal and private loans.
Are private eligible?
Is a credit check required?
Can I lower my interest rate?
Your interest rate is simply the weighted average of the original loans’ rates.
Your interest rate will be a new (hopefully lower) rate based on your credit score and other relevant finance data.
Will I save money?
Generally, you won’t see any savings. That’s because your new interest rate is a weighted average of your current loans, rounded up to the nearest eighth of a percent. If you extend your term, you may see your monthly payment decrease, but your total interest payments will increase.
Reducing interest rate can lower total interest costs and may lower monthly payments, depending on the term you choose.
Will I get one bill?

Looking for more guidance around student debt and financing education? Check out our Student Loan Help Center for education tools, articles, and news around all things student loans.

Learn more about managing your student loans with SoFi.

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SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.

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