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Tuesday, May 21, 2024

The IN’s and OUT’s of Student Loan Consolidation and Refinancing

Many graduates leave college bearing multiple student loans piled up. These loans come with different terms, payments, services, and statements.

The amount of information can be difficult to track. If you feel stressed when it comes to managing your student loan debt, don’t worry, there are ways to go about it. One way to make student loans easy to manage is through consolidation.

When you consolidate your debt, you combine all your loans into one. This is done by taking a new loan for the balance amount of the existing loans and using the new loan money to repay older debts. Then you can focus on repaying your new loan.

This eases your financial situation and makes it easy to keep track of your debt. Another benefit of consolidation includes securing favorable interest rates (through refinance student loans) and reduce monthly payments (by stretching your repayment term).

Read more: If you have a student loan, here’s what happens when the Fed lowers rates

Consolidation is a way to reduce your student loan payments. But, based on your position, you may have more suitable options.

  • Federal student loan consolidation reduces your payments by prolonging the loan-term.
  • Private student loan refinancing reduces your payments with a lower interest rate.
  • Income-driven repayment plans lower payments to a percentage value of your income.

Difference Between Consolidation and Refinancing


This involves combining multiple loans into a single loan, thereby you would only have to manage one loan instead of dealing with several separate loans, monthly payments, and billing statements.

Consolidation is possible only if your student loans were procured from government programs. The major benefits associated with consolidation are specifically reserved for government loans.

Debt consolidation programs can be perplexing. The general idea is that the agency will negotiate with creditors to make payments more affordable. You will make only one payment, and that payment goes to the agency, which then pays off your multiple loans for you.


Refinancing involves replacing a loan with a completely new loan, typically with much better terms. The goal is to get a lower interest rate in order to reduce your long term interest costs and monthly payments. Instead of the term refinancing, think of this as “optimizing” your debt so you pay less.

More About Federal and Private Student Loan Consolidation

Before you consolidate your loans, audit your situation to assess the best course of action.

Even with refinancing, consolidation doesn’t lead to lower interest rates and lower monthly payments. It might even lead to prolonging the loan and accumulating more interest.

The process differs for federal student and private student loans. Private lenders might consolidate both federal and private loans, but you cannot consolidate private loans into a federal Direct Consolidation Loan.

You can use refinancing to consolidate private with federal loans, but, that doesn’t necessarily mean it’s a good idea. This could eliminate any benefit or eligibility that you could have acquired from a federal loan program.

It’s not advisable to mix income-driven repayment plans, federal, and private loans.

Consolidating Federal Student Loans

When you’re consolidating your federal student loans, the government will merge all your debts into a single new loan known as a Direct Consolidation Loan. You can apply for this once you graduate.

Most federal student loans are acceptable for consolidation, including subsidized and unsubsidized Direct loans, subsidized and unsubsidized federal Stafford loans, Direct PLUS loans and others.

Pros of Consolidating Federal Student Loans

  •  Direct Consolidation loans offer one single payment and lower monthly payments.
  •  Consolidating federal loans is free, so watch out for companies which offer to consolidate federal student loans for a fee.
  •  No credit check is needed to consolidate federal student loans, and can be done online.

You should also consider other ways of tracking your debt and managing payments. This is because Direct Consolidation Loans have drawbacks as well.

Cons of Consolidating Federal Student Loans

  • A reduced monthly payment means paying the loan for a prolonged period of time, which will cost you more money in the long run due to interest.
  • When you consolidate your federal student loans, you lose the ability to target your highest interest or highest balance loans using methods called the debt avalanche or debt snowball.
  • Certain federal consolidation loans might come with higher interest rates than private loans. For instance, the average interest rate for Direct-unsubsidized loans for graduate or professional students is 6.6%, while some student loan refinancing lenders offer below 3%. This difference adds up over time. You can calculate the figures and percentages using a student loan refinance calculator, making it easier for you to determine which loans to take.

Be sure to assess all your options, from Direct Consolidation loans to other strategies, such as refinancing.

Refinancing Private Student Loans

Though privately acquired student debt isn’t accepted for federal loan consolidation, you can still refinance private loans through a private lender.

Terms and eligibility will differ between financial institutions. Certain private lenders may require you to borrow their minimum amount. Some use different criteria to evaluate your creditworthiness. Reach out to lenders to ask for their specific terms. Then, you can analyze and determine a loan based on your options.

Benefits and drawbacks of consolidating private student loans resemble those of consolidating federal loans.

Pros of Refinancing Private Student Loans

  • You can create an easy-to-manage financial situation, get better terms and secure lower monthly payment.
  • A major benefit of refinancing private student loans is the potential to secure a much lower interest rate. The rate will be based on your credit score.
  • If you possess a good credit score, or if your income and employment history is considerable, you are likely to receive a low rate, making refinancing a good option.

Cons of Refinancing Private Student Loans

  • A point to note when opting for refinancing is, if you are extending the repayment term, you will have increased payments due to interest accumulated over a long period.
  • A federal Direct Consolidation Loan is free of charge, whereas some private lenders will charge an initial, or processing fee. It’s best to avoid those lenders who charge this fee.
  • A credit check is needed to refinance private student loans. If your credit history is poor, you may have trouble being eligible.

Consolidating or refinancing student loans might seem like a good option, but there are many aspects to consider before determining if it’s the choice for you. Be sure to ask questions and evaluate all pros and cons in order to pay off your loans as soon and as economical as possible.