Student Loan Refinancing vs. Consolidation

Updated September 15, 2020

If you’re looking into student loan repayment options, you’ve likely heard the terms “student loan refinancing” and “student loan consolidation.” While often used interchangeably, these are two different repayment structures that offer varying benefits. Read on to learn about each of these processes, as well as which one might be right for you. 

Consolidation means compiling several loans into one. While it may increase your interest rate, federal student loan consolidation is a viable option if you want to simplify your repayment schedule without losing federal loan benefits. This type of consolidation can also make you eligible for some federal benefits, like Income-Driven Repayment (IDR) plans.

Student loan refinancing, on the other hand, is designed to save money by lowering your interest rate. This is a great option for borrowers with significant private student loan debt because you can combine your private and federal student loans into one monthly payment at a lower interest rate. While you will lose any federal loan benefits, if your primary objective is to save money in the long run, this may be the option you’re looking for.

Federal Student Loan Consolidation

Federal or Direct Loan Consolidation is all about simplicity. Regardless of your income or credit history, you can combine all your federally-funded subsidized or unsubsidized student loans into one monthly payment.

The benefits of consolidating your federal student loans include:

• Simplifying your payment schedule
• Exchanging multiple variable interest rates for one fixed interest rate
• Extending your student loan repayment term
• Maintaining federal student loan benefits including deferments, grace periods, and federal student loan forbearance

Opting for a Direct Consolidation Loan may also make you eligible for some government programs or Public Service Loan Forgiveness opportunities, including:

• REPAYE (Repay-as-You-Earn)
• PAYE (Pay-as-You-Earn)
• IBR (Income-Based Repayment)
• ICR (Income-Contingent Repayment)

Consolidation means you can say ‘goodbye’ to managing several variable interest rates. It doesn’t, however, guarantee you a lower fixed rate. Your new interest rate will equal the weighted average of all your previous rates rounded up to the nearest 1/8th percent.

Direct Loan Consolidation also means you’ll have the opportunity to change your student loan repayment term. With options from 10 to 30 years, you can choose to repay your loans quickly to cut back on interest or to extend your term for lower monthly payments.

If you’re considering federal student loan consolidation, choose your timeline wisely. You can only consolidate your federal loans once unless you add additional loans later.

Many types of federal student loans can be consolidated into a Direct Consolidation loan, including Direct Subsidized Loans, Direct Unsubsidized Loans, Parent PLUS Loans and more. To qualify for federal student loans you must:

• Leave school, graduate, or become a part-time student
• Have the loan types listed here to qualify
• Be in repayment or in the grace period of your loans

Private Student Loan Consolidation

Private student loan consolidation is synonymous with refinancing. It’s designed to reward fiscally-responsible borrowers with competitive interest rates and payment options that federal consolidation doesn’t offer.

Private student loan consolidation means letting go of federal benefits. These include Income-Driven Repayment plans, Private Student Loan Forgiveness (PSLF), deferments and forbearances. There are many factors to consider when deciding between PSLF vs Refinancing.

Although not guaranteed, reputable private lenders are invested in their clients’ success and offer support services to help keep their borrowers in good standing during unexpected financial hardship. ELFI pairs borrowers with expert Personal Student Loan advisors to provide a direct point of contact throughout the repayment process.

Private Student Loan Refinancing

Similar to Direct Loan Consolidation, refinancing student loans involves combining multiple student loans into one loan with one monthly payment. However, unlike Direct Loan Consolidation, this option is only offered by private lenders and allows the consolidation of both federal and private student loans should you wish to do so. 

Private student loan refinancing offers several unique benefits:

• Lowered interest rates, with your choice of fixed or variable rates
• The chance to extend or shorten your loan repayment term
• A simplified payment schedule

Student loan refinancing benefits include the ability to change your repayment term. ELFI, for example, offers repayment terms of 5 to 20 years. With a longer repayment term, your monthly payments will be lower, but you’ll pay more interest over the life of the loan. A shorter repayment term means higher monthly loan payments, but fewer of them.

Additionally, interest rates are calculated based on the borrower’s credit history and overall financial health, as well as current financial market conditions, rather than the weighted average of the included loans. This means, with a good credit score and payment history, you’re likely to improve your interest rate.

Before considering refinancing your student loan debt you want to make sure you have a steady and favorable income, a good credit score and a good debt to income ratio. ELFI’s eligibility requirements also include:

• Proof of U.S. citizen or permanent residence
• Documentation proving age of majority
• Minimum loan amount of $15,000
• Minimum income of $35,000
• Minimum credit score of 680
• Minimum credit history of 36 months
• Bachelor’s degree or higher
• Degree from an approved post-secondary institution

If credit score and financial history are in good shape, refinancing could be a great way for you to lower your interest rate.

When to Consolidate Student Loans

Consolidating and refinancing student loans both offer several unique benefits. If you’re having a hard time deciding which is right for you, here are a few circumstances in which you should consider Direct Loan Consolidation:

• If you hold multiple federal student loans
• If you’re using or plan to use an Income-Driven Repayment plan
• If you’re eligible for Public Service Loan Forgiveness
• If you’d like to extend your repayment term
• If you want to keep your federal student loan servicer
• If you’d like to keep your federal benefits including deferment or forbearance

When to Refinance Student Loans

If you have a good credit score and would like to lower the interest rate on your loans, student loan refinancing could be right for you. Here are a few other signs of when to refinance student loans:

• If you have a significant amount of private loans
• If you want to combine federal and private loans into one payment
• If you’d like to choose between a fixed and variable interest rate
• If you’re interested in changing your repayment term
• If you have a good credit score and want to lower your interest rate
• If you’d like to refinance a Parent PLUS Loan to your child

Can You Refinance Student Loans After Consolidation?

If you’ve already consolidated your student loans but now want to refinance, don’t worry! Even though you’re only eligible for federal consolidation once (unless you refinance to add additional loans), you can refinance your student loans even after consolidation.

Additionally, if you are wondering how many times can you refinance student loans, you can refinance an unlimited number of times, so take the time to research whether refinancing might improve your interest rate or other factors of the loan.

Which Is Right For You?

Federal student loan consolidation means simplifying your student loan payments without letting go of your federal benefits. Student loan refinancing, on the other hand, means lowering your monthly interest rate if you have a strong financial track record. Even if you’ve already consolidated your loans, you still have the option to refinance anytime.

Choosing the financial path that is right for you and your budget is paramount. Compare the terms, interest rates and benefits of your current student loans against multiple lenders and decide if switching is worthwhile. 

Then, figure out what you can comfortably pay each month and how long you intend to make payments on the loan (our student loan refinancing calculator helps borrowers choose a loan term that fits different budgets). Finally, take a look at our application process or give us a call at 1-844-601-ELFI.* 

Whether you choose to consolidate federal student loans, refinance a combination of private and federal student loans, or refinance private student loans, our team works as your advocate, steering you in the direction that is right for you and your budget.

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