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 offered through the federal government for federal student loans only. Refinancing is done with a private lender and can include both federal and private student loans.
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, rounded up to the nearest one-eighth of a percent.
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 current market rates, your credit profile, your employment history, and your debt-to-income ratio.
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. However, consolidating doesn’t typically result in any interest savings, as the rate is simply the weighted average of the loans you’re consolidating, rounded up to the nearest one-eighth of a percent.
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 Federal Family Education Loan (FFEL).
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. You can refinance both federal and private student loans. The new loan will have a new interest rate and terms, which as mentioned, are based on personal factors such as an individual’s credit history, employment history, and debt-to-income ratio.
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.
It’s important to note that when you refinance student loans with a private lender, you lose access to federal loan forgiveness programs and payment assistance programs, such as income-driven repayment plans and student loan deferment.
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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 and/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.
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. As of June 2023, current student loan refinance rates with SoFi start at 4.99% APR with autopay for fixed rate loans and 5.99% APR with autopay for variable rate loans. As noted previously, the rate you get typically depends on your total financial picture, including your credit history, 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 may 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’ll no longer be eligible for federal loan protections, including deferment and forbearance. Some private lenders, however, do offer their own benefits, such as 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 or not you plan on using federal benefits, and if 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.
The Takeaway
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 loans you’re consolidating, rounded up to the nearest one-eighth of a percent. When you consolidate, you keep your federal benefits and protections.
Refinancing student loans allows borrowers to combine both federal and private student loans into a single new loan with a new interest rate. The rate may be variable or fixed, and will be determined by the lender based on criteria like market rates and the borrower’s credit history. Again, refinancing will eliminate any federal loans from borrower protections, including 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. SoFi offers an easy online application, competitive rates, and no origination fees.
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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