Consolidate Student Loans vs. Refinance Student Loans: What’s the Difference?

Written by: Matt Kuncaitis
Updated: 4/12/21

After graduating college, many students find themselves saddled with student loan debt. When faced with multiple bills from various lenders, they may start looking at loan consolidation or refinancing as a way to improve their financial situation. These two methods can help borrowers begin to repay their student loans, but there are key differences between them. 

We’ll explore what you should know about loan refinancing and consolidation and what differentiates the two so you can make the best possible decision for your financial health.

What’s the Difference Between Student Loan Refinancing and Consolidating?

Both loan consolidation and student loan refinancing can help simplify loan repayment, but they have some core differences. 

Loan consolidation generally refers to the process of bringing multiple federal student loans together into a single loan through the federal government. Student loan refinancing generally refers to the process of refinancing private or federal student loans into a new loan from a private lender, as opposed to through the government. Private student loans are not eligible for federal student loan consolidation. However, federal student loan consolidation is actually a form of refinancing – you’re getting a new loan with a new rate. Some private lenders call their refinancing programs “consolidation” and Discover offers a “Student Loan Consolidation” product, but these are actually referring to refinancing. 

Let’s explore these two concepts more in-depth.

Federal Student Loan Consolidation

Federal student loans are offered through the Federal Student Aid program (part of the U.S. Department of Education) and come with various borrower benefits. If you have this type of student loan, you might also be eligible for various loan forgiveness programs, such as Public Service Loan Forgiveness (PSLF).

Borrowers with federal student loans generally want to keep them with the federal government because transferring federal student loans to private lenders through refinancing can impact eligibility for certain programs. Federal student loans are eligible for consolidation, which is a form of refinancing.

With federal student loan consolidation, borrowers can bring multiple federal student loans together into a new loan. Going through this process can help simplify the repayment process, as you’ll only have to make a single payment rather than the possibility of multiple payments to different federal loan servicers. You may also get lower monthly payments, as the length of time left to pay back the loan is recalculated with consolidation. The fixed interest rate will be calculated as the weighted average of the interest rates of the loans being consolidated, rounded up to the nearest .125%.

As borrowers consolidate their federal student loans, though, they should pay careful attention to the benefits they have on each of their loans such as interest rate discounts. 

To be eligible to consolidate your federal student loans, you must:

  • Be either in the process of repaying your loans or within the grace period
  • Not have already consolidated your loan, unless you are including an additional eligible loan
  • Carry the qualifying loans listed on the Student Aid website (note that this doesn’t include the Direct PLUS loans for parents)

If you have any questions on the process or want to proceed with an application for consolidating your federal student loans, you can do so right on the Federal Student Aid website.

Private Lender Student Loan Refinancing

Some borrowers may need to take out student loans from private lenders after they’ve reviewed their federal aid options. Private lenders generally have eligibility restrictions such as the following:

  • You have to meet credit and income requirements or have a co-signer who does.
  • You have to use the money to pay for your education.
  • You have to meet any requirements related to age or citizenship.

Student loans from private lenders have varying interest rates and the actual rate you receive will be highly based on the borrower’s credit. The type of loan you take out will also impact your interest rate.

With federal and private student loans, borrowers can refinance their loans. With refinancing, you may be able to secure a lower interest rate or you may lower your monthly payments. You can also bring all of the loans together into a single account, which will simplify the loan repayment process.

How Does Repayment Work for Refinancing and Direct Consolidation Loans?

Student loan repayment varies between refinance loans and Direct Consolidation Loans due to different factors that impact how the loan gets repaid, including the length of the repayment term and loan terms. We’ll review how repayment works for both types of loans. 

Direct Consolidation Loan Repayments

Once you consolidate your federal student loans into a Direct Consolidation Loan, you’ll have a single monthly payment instead of the multiple payments you had before. Once you’ve finished the consolidation process, your former loans no longer exist — you’ll only owe the total on the new loan because the balances you had on your former loans were brought together into this new loan. This entire process can be completed without an application fee and at no additional cost to you.

A fixed interest rate means that the interest charged on the principal of your loan — the amount that you took out for the loan — will be the same throughout the entire life of the loan. 

Regardless of the economy or market conditions after you sign your paperwork, your monthly payments remain the same. A variable rate loan, however, means that the interest charged can potentially change throughout the life of the loan. Therefore, the amount you have to pay each month might change, too. 

Your federal education loans come with few repayment options. For example, the government offers several income-driven payment plans, which means that the amount you pay varies depending on your income and the number of people in your household. There is also a standard payment plan, which simply determines a monthly amount based on the amount of principal and interest to be paid, and graduated plans, where the amount owed each month increases over time. When you consolidate your loan, you can review the best repayment option for you.

Once you finish the consolidation process, you’ll begin making payments on your new loan 60 days later. You’ll receive specific information, including the date of your next payment, with the new loan paperwork.

Private Loan Refinance Repayments

Private lenders have both variable and fixed rate student loan refinancing options. Many appreciate the fixed rate loan option, as this allows for predictable payments and prevents the worry that an economic change could result in significantly higher interest rates. Variable rate loans may start with a very low interest rate, but the rate can easily increase by a significant amount since these rates are subject to change with the market.

Regarding repayment when it comes to refinancing, your old loans are paid off and you only have one student loan to worry about. However, the new interest rate will be based on various factors, including:

  • Your credit score and credit history
  • The length of the loan
  • Your repayment history

The interest rate you receive will impact how much you owe each month and the total amount you will repay over the life of the loan. After you fill out your loan application, you’ll learn what interest rate you qualify for and your loan terms. You’ll also receive information about when your payments begin. In some cases, you can do a soft credit check and see the interest rates for which you qualify. 

Explore the Best Refinancing and Consolidating Options

It can be a pain navigating the world of student loan repayment, but it doesn’t have to be. Understanding the resources available can help you navigate your options for managing student loans. Consider the above information as you begin to evaluate your options for loan refinancing or loan consolidation.

At, we work to help potential and current borrowers understand everything they need to know about student loans, including loan terms and options for repayment. We also explore online lenders and provide advice for the application process. Our team of experts works to help students and graduates confidently take control of their student debt. Learn how we can help you navigate your student loans.

FAQs: Consolidation vs. Refinancing Student Loans

When Should I Consider Refinancing My Student Loans? 

The best time to refinance your student loans is when the change will benefit your finances the most. Refinancing your student loans can help you lower your interest rate and your monthly payment, and can save you money over the length of the loan. You don’t have to wait until you have an ideal credit score to begin the process; you just want to secure a loan with a better interest rate and terms compared to what you have now. 

In addition to looking at your interest rate, you also want to consider the length of the current loans. For example, if you are already halfway through your original loan terms, refinancing to another loan could significantly increase the length of time you pay and the total interest you pay. Look carefully at the length of the new loan, the total you’ll pay in interest, and the total you’ll pay with your current loan terms. Make sure enrollment makes financial sense.

Will Consolidating Student Loans Hurt My Credit?

When you apply to consolidate your federal student loans with the federal government, the government won’t do a credit check. Therefore, consolidation doesn’t impact your credit score.

If you refinance your federal student loans with a private lender, though, the answer differs. In this situation, you ask the loan provider to pay off your old loans and open a new loan that will bring together the loan amount from your old loans. Since you’ll have a new loan, the lender will do a “hard pull” on your credit report. This means it can cause a temporary dip in your credit score. However, this change will be short-lived.

In the long term, consolidating your education loans can benefit your credit score. If you lower your monthly payments, you may find it easier to pay the loan on time and in full each month. Since you have fewer loans to manage, it will also simplify your ability to keep track of everything, thus ensuring you don’t miss payments. Finally, if you have lower monthly payments, you also improve your debt-to-income ratio, which can help your credit.

What Is the Best Way to Consolidate Student Loans?

The best way to consolidate your federal student loans is to apply for free with the federal government. You don’t have to pay to go through the consolidation process or apply for consolidation. You only need to fill out the form offered on the Student Aid website and see the new Direct Consolidation Loan terms available to you.

What Are the Benefits of Consolidating and Refinancing Student Loans? 

Borrowers can uncover a variety of benefits when consolidating and refinancing their student loans. These benefits include:

  • Bringing multiple loans together into a single, more convenient payment
  • Adjusting loan terms to potentially decrease monthly payments
  • Getting a lower interest rate and paying less in interest over the life of the loan
  • Transitioning from a variable interest rate to a fixed interest rate

What Are the Downsides to Consolidating and Refinancing Student Loans?

Borrowers will also want to carefully review the potential drawbacks to refinancing or consolidating.

  • Consolidating federal student loans can occasionally hinder access to some benefits for individual loans, such as interest rate discounts.
  • Moving federal student loans to private student loans with refinancing can result in the loss of federal protections and benefits, such as loan forgiveness programs.
  • If the loan is consolidated for a longer loan term, even if the monthly payments are smaller, the total amount paid in interest by the end of the term might be larger.
  • Consolidation under the federal system can also result in the loss of credits made toward income-driven repayment plans or forgiveness plans.