Student Loans: Refinancing or Consolidating

At some point you may want to change how you pay off your student loans, and two terms may pop up while exploring options: consolidation and refinancing. Although search results for one can surface when looking up one term of the other, there is a difference.

Consolidation vs. refinancing – super basic definition

Consolidating student loans means making one payment to one servicer.

The term consolidating is limited to federal student loans and can only be done through the Direct Loan Program or the Department of Education.

Refinancing refers to both private and federal student loans and can be done through a private lender. The similarity is that private lenders can provide the one-payment, one-lender experience. The difference is that they can be used for federal loans, private loans, and a combination of both.

Consolidating student loans

Consolidating student loans is when you combine your direct loans into a single payment and switch from paying several loan servicers to paying just one. Consolidated student loans have new terms, such as a lower monthly payment, but also have a longer repayment period – which could mean paying more over the life of the loan. But, that’s not the only downside.

Consolidation doesn’t just combine outstanding loan balances; it also combines the weighted average interest of the individual loans into one. This means that the new interest rate will likely be on-par with the previous loans and that won’t save you any money in the long run, either. Consolidation is limited to federal student loans and can only be done through the Direct Loan Program or the Department of Education, and it doesn’t offer any interest savings.

Student loan consolidation benefits – now vs. then

Furthermore, consolidating federal loans may not save students the amount of money it used to. Students who took out federal loans, such as the Federal Stafford and Plus loans before 2006, had variable-rate loans, and consolidating them through a federal program was a way to get a lower rate.

As explained by Connecticut’s Office of Legislative Research, rates for these federal student loans changed from variable to fixed as a result of the 2005 Deficit Reduction Act. This is why consolidation works out differently for new student loans as of 2006: consolidation doesn’t provide a way to capture a lower rate for these later loans, because their rates don’t fluctuate. Instead, the government programs establish the new rate by averaging the rates of the loans being combined.

In all cases, the consolidated student loan may have new terms, such as a lower monthly payment, but it may have a longer repayment period, which could mean paying more over the life of the consolidated loans.

Student loans that can be consolidated

Not all federal student loans can be consolidated, and there are limitations.

• Federal student loans—direct loans and Federal Family Education Loans – can be consolidated though the Federal Direct Loan Consolidation program.
• Only federal loans can be consolidated. Private loans cannot be mixed in.
• Consolidated loans have to be for the same borrower, so one loan cannot include student and Parent PLUS loans.
• PLUS loans provided through the Federal Family Education Loan program (none have been issued since 2010) can be consolidated.
• Parent PLUS Loans can be consolidated through a Direct Consolidation Loan. They cannot be combined with loans taken out in the student’s name.

The Department of Education has a list of loans that can be consolidated here.

Student loan refinancing

Refinancing student loan debt means applying for a loan through a private lender, like Laurel Road, who pays down your student loan(s) and replaces them with the refinanced loan, which includes new terms.

This new loan could combine several loans, including federal ones, offering the ease of one-lender, one-payment, as well as the possibility that it could save you money with a lower interest rate. Just note that if you refinance federal student loans with a private lender you will lose access to federal programs, such as Income-driven Repayment (IDR), federal forbearance, and any other benefits offered to federal borrowers.

Refinanced loans, like consolidated ones, include new terms such as a new monthly payment and payment duration.

There are definite differences between student loan refinancing and consolidation. With consolidation, you can combine all your federal student loans, so you can focus on one payment each month. With student loan refinancing, you have the option of lowering your interest rate and repayment terms – including private student loans – reducing both monthly payment and total repayment amount. Everyone has different needs, but when it comes to saving, who doesn’t want to do that? Can student loan refinancing save you? Find out here.

Student loans that can be refinanced

• Federal student loans
• Private student loans
• Parent PLUS loans

Additional considerations

Federal loans may have higher interest rates than private loans, but they include a variety of repayment plans. For example, through IDR, your monthly student loan  payments could be calculated based on your discretionary income and family size, and your student loan debt could be forgiven after 20 or 25 years, depending on which IDR plan you enroll in. You lose those the ability to enroll in IDR if you refinance federal loans (which means going with a private lender) instead of consolidating them through the government.

Refinancing student loans could make sense if you are confident in your work prospects. The terms are not as flexible as those that come with federal loan consolidation – the amount you agree to pay every month does not change. It is the same until the balance is paid in full. (The amount may change if you decide to refinance your student loan again.)

Student Debt and Parent PLUS Loans

Parents can refinance their PLUS loans and may get benefits, like lower interest rates, which can lower their costs over the life of the loan.

Refinancing Parent PLUS loans can have an additional benefit – assuming the now-graduate is ready to take on the debt, the parent can refinance the loan in the graduate’s name—the student has to apply for the refinancing – as long as all parties  agree.

Refinancing Parent PLUS loans has the same implications as refinancing student loans – the new loan, which is from a private lender, has new terms and will not include repayment options, such as extended and graduated repayment, that came with the original loan.

You can consolidate and refinance