It’s possible to consolidate or refinance your student loans into one loan with a single monthly payment. The major difference between these two options is that consolidation is generally offered through the federal government for federal student loans while refinancing is generally completed with a private lender.
When you consolidate student loans with the federal government through the Direct Loan Consolidation program, the new interest rate is the weighted average of your prior rates. Another option is student loan refinancing, which can be completed with a private lender. If you refinance, the new interest rate on your loans is based on factors like your credit score, employment history, among others.
Understanding the differences between consolidation versus refinancing is critical before deciding to take the plunge — especially since private refinancing means you lose your federal student loan benefits.
What Is Federal Student Loan Consolidation?
You can combine your federal student loans into one by taking out a Direct Consolidation Loan from the government.
Consolidating your loans may help simplify your repayment process if you have multiple loan servicers. In some cases, consolidating your loans may also be necessary if you are interested in enrolling in an income-driven repayment plan . In order to use a Direct Consolidation Loan, you must have at least one Direct Loan or one FFEL.
The interest rate on a Direct Consolidation Loan is fixed and is the weighted average of the rates on your existing loans. What you end up with really depends on what rates were when you took out your loans (some Direct Consolidation Loan payment plans also factor in your total education debt, including private student loans).
For example, if you took out a Direct Subsidized Loan of $25,000 for undergrad with a 3.73% interest rate, a Direct Unsubsidized Loan of $50,000 for grad school with a 5.28% interest rate, and another Direct PLUS Loan of $10,000 for grad school with a 6.28% interest rate, your weighted average rate would be 4.94%.
You can also use SoFi’s debt navigator tool to explore your student loan refinancing options and get a sense of what might be best for your unique situation.
What is Student Loan Refinancing
When you refinance student loans, it means you are borrowing a new loan which is then used to pay off the existing student loans you have. This new loan will have a new interest rate and terms, which as mentioned, are based on personal factors like an individual’s credit history and their employment history.
Refinancing is completed with a private lender and borrowers may have the choice between a fixed or variable interest rate. In some cases, borrowers who refinance to a lower interest rate may be able to spend less in interest over the life of the loan. To get an idea of what refinancing your student loans could look like, you can take a look at SoFi’s student loan refinancing calculator.
Comparing Student Loan Refinancing and Consolidation
As previously mentioned, consolidation can be completed for federal student loans through a Direct Consolidation Loan. Refinancing is completed with private lenders and can be done with either federal or private loans. An important distinction is that Direct Loan Consolidation allows borrowers to retain the federal benefits and borrower protections that come with their federal loans while refinancing does not.
Depending on how a borrower’s financial situation and credit profile has changed since they originally borrowed their student loans, refinancing could allow borrowers to secure a more competitive rate or preferable terms. The rate and term on a refinanced loan will be determined by the lender’s policies and the borrower’s financial situation and credit profile, including factors such as credit score, income, and whether there is a cosigner. Generally, borrowers can choose between a fixed or variable interest rate.
The interest rate on a Direct Consolidation Loan is the weighted average of the previous loan’s interest rate and all interest rates are fixed for the life of the loan.
Private Student Loan Refinancing Rates
It may be possible for borrowers to qualify for a more competitive interest rate by refinancing their student loans with a private lender. Student loan refinancing rates vary widely. According to Forbes, in December 2021, the average fixed interest on a 10-year refinanced student loan was 3.40%. On a five-year variable-rate loan the average interest rate was 2.49%. As noted previously, the rate you get typically depends on your total financial picture and credit history, including your credit score, income, and employment history.
Borrowers may also consider applying for student loan refinancing with a cosigner, which could potentially help them qualify for a more competitive interest rate.
Why Interest Rates Aren’t the Only Thing to Consider
Interest rates aren’t the only thing to consider when deciding whether to consolidate or refinance. If you go with a Direct Consolidation Loan, keep in mind that you might pay more overall for your loans, since this usually lengthens your repayment term. You will also lose credit toward loan forgiveness for any payments made on an income-based repayment plan or the Public Service Loan Forgiveness program.
If you refinance with a private lender, you won’t be eligible for student loan forgiveness, because you lose federal loan protections, including deferment or forbearance when you refinance with a private lender. But some private lenders, like SoFi, offer their own benefits, like a temporary pause on payments if you lose your job through no fault of your own.
It’s important to think carefully before consolidating or refinancing your student loans. Consider things like whether a prospective private lender offers any options for relief if you hit a rough patch.
Even if you get a lower interest rate, make sure you can afford the new monthly payments before committing. And remember that this information is just a starting point for your decision. Don’t be afraid of doing more research and trusting you’ll make the right decision for you.
Consolidating federal student loans can be done through the federal government with a Direct Consolidation Loan. The interest rate on this type of loan is the weighted average of the interest rates on the existing loans.
Refinancing allows borrowers to combine both federal and private student loans in a single new loan with one interest rate. The rate may be variable or fixed, depending on the lender, and will be determined by the lender based on criteria like the borrower’s credit history, among other factors. Again, refinancing will eliminate any federal loans from borrower protections like income-driven repayment plans.
Depending on an individual’s personal circumstances, either consolidation or refinancing may make more sense than the other. If refinancing seems like an option for you, consider SoFi, where there are no hidden fees and borrowers have access to benefits like career coaching.
SoFi Student Loan Refinance
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.
CLICK HERE for more information.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.