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Student Loan Consolidation vs. Refinancing in 2023

Student loan consolidations and refinancing are two tools that can be extremely useful to borrowers who are paying back their student loans. But the terms can be a bit confusing; they both offer a restructuring of your loans and typically bring about new repayment plans. So what exactly are the differences?

In this article, we’ll go over what exactly each of them means, and help you decide which one you would benefit from.

Jump ahead to:

• What is student loan consolidation?
• What is student loan refinancing?
• So, what should I do?
• Other ways to change your student loan repayment schedule

What is student loan consolidation?

Student loan consolidation is the process of combining multiple federal loans into one main loan. Only federal loan holders are able to do this; private loans do not typically offer the option. You can consolidate any type of federal loan – including Direct, PLUS, and Perkins – into a Federal Direct Consolidation Loan. Here are some pros and cons for choosing this option:

Benefits

• Lower your monthly payment – By consolidating your loans, you can change your repayment time and achieve a lower monthly payment. So, if you are having trouble making your current monthly payments, consolidation can ease the financial burden and set you up for more manageable payments in the long-run. Unlike solutions such as deferment, consolidated loans offer a long-term, sustainable and reliable solution to excessively high monthly payments.
• No cost – Consolidation is entirely free and relatively easy. Although some private firms may contact borrowers to offer consolidation services for a fee, these are not required. You can consolidate your loans directly with the government quickly and easily.
• Convenience – If you have taken out federal loans with multiple different servicers, you probably have to make multiple monthly payments with different companies. This can prove to be a bit disorienting, and consolidation can ease this burden. However, if this is your only reason to consolidate, it may not be worth it. By setting up AutoPay on each of your loans, you can lessen this burden without consolidation. Be sure to read through our cons section before making a final decision.

Drawbacks

• Paying more in interest – Consolidation typically leads to a longer repayment period, meaning that you will end up paying more in interest over the life of the loan. If you are not in a position of needing lower monthly payments, sticking to your current plan and paying the loan back faster will result in less money spent.
• Possible loss of benefits – Some types of federal loans, such as Subsidized Direct Loans, come with special benefits that you will lose if you consolidate them. For example, if you decide to go to grad school while in loan repayment, you can defer your Subsidized Direct Loans and they will not gather interest for the entire time that you’re in school. Direct Consolidation Loans, however, do not enjoy this benefit.
• Outstanding interest converted to principal – If, at the time of consolidation, you have any outstanding interest to pay, this becomes part of your principal, and in turn, begins to gather interest. So, you’ll end up paying interest on interest, and overall, paying more money back to your lender.
• Possible loss of progress towards PSLF – Public Service Loan Forgiveness is a plan which forgives federal student loans after 10 years of payments while working in a qualifying public service field, such as firefighting, teaching, nursing, or military service. In some cases, consolidation can erase repayment progress towards these ten years. These rules are very complex, as in some cases, consolidation can actually help you reach your PSLF goal. For more information, check out our article on PSLF and our article on how PSLF policies have changed under Biden.

What is student loan refinancing?

Student loan refinancing is the process of changing the terms of your student loan repayment. You can do this either by renegotiating with your lender, or having another lender buy out your debt from your current lender, and then beginning to repay them under new terms. 

Both federal and private loan borrowers can refinance student loans. However, as we’ll go into later, federal borrowers should be especially cautious of refinancing, as they will have to convert their loans into private loans in order to refinance. Here are a few of the benefits and drawbacks of refinancing.

Benefits

• Possibility of lower interest rates – There are a few situations in which a borrower could achieve lower interest rates through refinancing. One of them would be a drop in interest rates. If the borrower took out loans during a period of high rates and they have since dropped, they could renegotiate or strike a deal with another borrower at the current economy’s rate. Another could be finding a new cosigner. If the borrower finds a cosigner with a strong credit history, they could find loans with more favorable interest rates.
• Extended repayment period – Through refinancing, the borrower can renegotiate a repayment schedule. They can strike a deal for a new 10-year or even longer repayment. This allows them to lower monthly payments, which is helpful during times of financial stress.
• Offer of a cash bonus – Sometimes, lenders offer student loan borrowers a cash bonus for refinancing with them. This is not always a good enough reason to refinance, but it can add to an already-sweet deal for a student looking to pay back their loans.

Drawbacks

• Possibility of losing federal loan benefits  – If you are a borrower with federal loans thinking of refinancing, make sure to think about your decision long and hard. Federal loans cannot be refinanced into other federal loans; they always become private. And private loans do not include a host of advantages that federal loans do, including income-based repayment plans, deferment for national emergencies, and the possibility of loan forgiveness. Although a lower interest rate may make this trade-off worth it, it is certainly worth some serious thought.
• Potential to be logistically complicated – To educate yourself sufficiently on the terms of your new potential loans and to complete all the paperwork and the logistics is not a simple task. Make sure that the benefits are actually worth it before you devote yourself to the task of refinancing. And be sure to shop around using student loan marketplaces to find the best option.

So, what should I do?

If you are a federal loan borrower looking to lower your monthly payments, consolidation is often the right move for you. Although you won’t be able to lower your interest rate, you can change your repayment period in a way to make monthly payments more manageable. You’ll end up paying more overall due to the additional time for interest to gather, but you will maintain your federal loan advantages. 

If you are a federal loan borrower who doesn’t mind losing out on federal repayment benefits, and who can achieve a lower interest rate, refinancing is the right move for you. Just make sure that you feel confident that you’ll be able to continue to make those monthly payments for a long time, and that you won’t want to take advantage of federal deferment if you return to school in the future.

If you are a private loan borrower looking to lower your interest rates or change your monthly payment, refinancing is the right move for you. If you can find a lender with a lower interest rate, a cosigner with a high credit score, or if you just want to lower your monthly payment, refinancing can be just what you’re looking for. You won’t lose out on any federal benefits because your loans are already private. Just make sure to read over your private loan terms and conditions carefully, as not all of them are the same.

Other ways to change your student loan repayment plan

Refinancing and consolidation are two of the most common ways to change your student loan repayment plan. However, they are not the only ones. Federal borrowers can take advantage of income-based repayment plans to reduce their monthly payments during economic hardship. They can also apply to defer their loans. These options allow you to keep the terms of your loan exactly the same, but lower your monthly payments. They may be more convenient and can easily adjust back into a normal schedule when you get out of your economic hardship.