Consolidation Vs. Refinancing: Which is Right For You?

Updated November 13, 2019

Anyone who has taken out a student loan has probably been required to sign a promissory note, which confirms a borrower’s responsibility to pay back the money they borrowed to pursue higher education. Many colleges and universities require exit counseling to inform their graduates of the repayment options available through federal loan programs. However, with private financing companies now offering additional options that could possibly lower monthly payments or interest costs over time (also known as student loan refinancing), many financially savvy individuals seek to minimize and simplify their financial debts.


Choosing the right student loan repayment program can be confusing, and borrowers need to be aware that both federal and private lenders offer plans designed to match their budgeting capabilities and financial goals. In today’s financial environment, graduates may want to take advantage of lower interest rates while paying off their debt as soon as possible, or they may prefer to free up extra cash by choosing an extended term with lower payments.  


When is comes to changing your student loan repayment plan, two common terms that often get confused are “consolidation” and “refinancing.” While these two terms are sometimes used interchangeably, they actually represent two different options. This blog outlines the differences between student loan consolidation and student loan refinancing of both private and federal student loans, so you can know which is right for you.


Federal Student Loan Consolidation

Federal or Direct Loan Consolidation allows borrowers to combine multiple federally-funded subsidized or unsubsidized student loans, regardless of income or credit history, into one payment that uses a weighted average of all interest rates rounded up to the nearest 1/8th percent. This form of student loan consolidation is only available for federal loans – student loans acquired by a private lender are not eligible. The benefits of this form of consolidation include the ability to combine loans into one simple payment, the opportunity to switch from various variable rates to one fixed interest rate, and the ability to extend the life of the loan, thereby lowering the total of monthly payments. Borrowers in the federal program are also eligible to take advantage of programs such as deferments, forbearances, or grace periods that temporarily reduce or suspend monthly payments during times of financial hardship. These federal student loan repayment options are typically known as Income-Driven Repayment Plans such as Income-Based Repayment (IBR), Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), and Income-Contingent Repayment (ICR). The downside is that borrowers can be less likely to save money or see drops in interest rates with these plans. Also, borrowers who extend the life of the loan to lower their monthly payment will likely pay more in interest over the life of the loan.


Private Student Loan Refinancing

Similar to student 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 includes the consolidation of both federal and private student loans. Student loan refinancing can reward borrowers who demonstrate responsible financial habits with rates and payment options not offered through the federal consolidation program. New 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. Student loan refinancing can offer the greatest opportunity for a borrower to save money on their student loans since the new rate is applied to every loan that is refinanced. However, it is important to note that when borrowers refinance with a private lender, they may lose the benefits associated with federal student loans, such as income-based repayment, loan forgiveness, deferments, and forbearances. Although not guaranteed, reputable private lenders are interested in the success of their clients and offer support services to help keep their borrowers in good standing during unexpected financial hardship, so be sure to consider the level of customer service available when choosing to refinance your student loans.


Which Is Right For You?

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 to a new potential lender and decide if the potential savings and the stability of your financial situation make the switch worthwhile. Then, figure out what you can comfortably pay each month and how long you intend to make payments on the loan (our loan payment 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 or refinance the combination of private and federal student loans, our team works as your advocate, steering you in the direction that is right for you and your budget.



*Subject to credit approval. Terms and conditions apply.