- Student Loan Consolidation
- Definition: The process of merging or combining one or more existing student loans into a new single loan with one (often extended) repayment term.
- Student loan consolidation helps with a primary goal of reducing monthly payment amounts or reducing the number of companies to deal with, or both. An interest rate reduction may not necessarily be achieved through consolidation (especially through the Federal program), but may be achieved through student loan refinancing; typically offered by a private lender.
- Private Student Loan Refinancing
- Definition: To refinance student loans means to restructure student loan debt, usually at a lower rate and with an extended repayment term. This can involve paying off one or multiple loans. Borrowers can refinance both private and federal student loans. To qualify, you must have a strong credit profile and employment history, or proof of income.
Student loan consolidation doesn't have to be complicated.
We make it easy
We’ll walk you through some of the key considerations as you decide whether refinancing or consolidating is right for you (there are even situations where you might want to do a mix of both). We can also help connect you with lenders who participate in refinance and consolidation programs that offer the terms and benefits you may be looking for, and get the process started for both federal and private student loans.
(If you’re already well-versed in your consolidation options, but are looking for information on newer programs such as a Home Equity Line of Credit (HELOC) Refi, we’ve got that covered as well.)
What does student loan consolidation mean?
What does it mean to refinance private student loans?
How is student loan refinancing different than student loan consolidation?
Student loan refinancing allows you to modify either one or multiple student loans with new terms, including a lower interest rate. You can combine both federal and private student loans, should you choose to do so. Or you can refinance only loans from one program. In contrast, student loan consolidation typically refers to the federal program known as the Direct Consolidation Loan; although sometimes people use the term ‘consolidation’ to simply describe the merging of many loans into one.
Direct Consolidation Loan
The Direct Consolidation Loan program is for federal student loans only. This free program combines the balances of your existing federal student loans into new, single loan with an interest rate based on the weighted average of the loans you want to consolidate.
(Confused? This article on Direct Consolidation Loan goes into greater detail.) With this program, you retain all of the benefits and protections that are part of the federal student loan program. If you have older, variable rate loans, you can also lock in a fixed rate which can make it easier to plan for your financial future.
Private student loan refinancing
This is where the terms can get a little confusing. When people refinance, they take out a new loan to pay off several student loans. This helps simplify their bills. Not only can this process simplify your payments, but you may also lock in a lower interest rate and increase your repayment term options.
A student loan refinance may be used for Direct Student Loans, private student loans or a combination of the two. You may hear this option referred to as "consolidation" or "refinancing," interchangeably.
Note: The federal government does not have a student loan refinancing program. If you refinance your Direct Loans with a private loan, you will lose the deferment, forbearance, forgiveness and cancellation provisions of the Direct Loan and PLUS programs.
Which is right for you?
The nice thing about these options is that you don’t have to choose one or the other. You may want to consolidate your federal student loans through the Direct Consolidation Loan program, and refinance some or all of your private student loans. Or you may decide that the benefits of a private loan refinance outweigh the protections offered by the federal student loan program, and choose to refinance some or all of your federal student loans as well.
When it comes to choosing to consolidate, refi, or both, ask yourself: What are you hoping to achieve?
As with most things, there are pros and cons to each option. It’s best to start by clearly defining your goals.
Why should you refinance or consolidate your student loans?
- Smaller monthly payments
If a smaller monthly payment is your goal, keep in mind that the typical trade-off is an extension of your repayment term. If adding a few years to the term of your loan helps you make your payments on time and stay out of default, this might be the option for you.
- Lower interest rate
Sometimes, you will find that a private loan refinance offers you a lower interest rate than Direct Consolidation Loan. You can refinance existing private student loans or refinance federal student loans (or both), but be aware that when you move a federal student loan to a private student loan, you lose the benefits that are part of the federal student loan program. (Some private lenders offer limited deferment benefits, but these are not guaranteed and can vary from lender to lender.)
- Extended repayment period
Along with smaller monthly or quarterly payments, your financial situation may dictate that you need more time to pay off your loans. When you consolidate, you can reset the clock. If you are participating in the Direct Consolidation Loan program, this may give you an additional period of time to pay off your balance. If you choose private loan consolidation, you may choose to extend your repayment term to as long as 20 years with some lender options. Extending your payments will likely cost you more in the long-run, but the trade-off is keeping your payments within your budget and on-time.
- Reduction in the number of loans and loan servicers you're paying every month
If you took out multiple loans from different lenders in order to pay for school, the various lenders and differing due dates can be beyond burdensome. If you’re looking to simplify your life, consolidation can reduce the number of creditors you are paying each month or quarter.
We’ve got your back
Our website is packed with resources to help you make informed decisions about your student loans. Check out our consolidation calculator to estimate new monthly payments, compare lenders on our Lenders page, educate yourself with our Resources and explore our Must Reads for things you need to know right now.