Student Loan Refinancing vs. Consolidation: Key Differences

BIG Ideas:

• Although both student loan consolidation and student loan refinancing can simplify repayment, they work very differently.
• Student loan consolidation combines federal loans into one new federal loan, while refinancing can replace federal loans, private loans, or both with one new private loan.
• The best option for you depends on whether you want to keep federal loan benefits, and whether a lower interest rate could help you save.  

It’s often been said that college is like a bubble, where your biggest concerns are classes, exams, and how you’ll spend your weekends.

Then, before you know it, it’s time to leave that bubble and face a whole new set of responsibilities, like finding and managing a job, securing a place to live, and, before long, paying back your student loans. 

Ugh, that.

While you’re in that bubble, you may not think much about those student loans. But after graduation, they can quickly become a harsh reality. Many borrowers find themselves with monthly payments that are tough on their budgets, especially if they’re making multiple payments on different loans.

Fortunately, there are two options that may help – student loan consolidation and student loan refinancing. Though both can simplify repayment and make your loans easier to manage, federal student loan consolidation and student loan refinance work very differently. 

Let’s look at federal student loan consolidation and student loan refinancing to help you decide which one may make sense for you.

How do Student Loan Consolidation and Student Loan Refinancing Differ?

Although both combine loans, federal student loan consolidation and student loan refinancing differ in several ways, including who offers them, how interest rates are determined, qualification requirements, and eligibility for federal loan benefits.

What is Federal Student Loan Consolidation?

Offered by the federal government, federal student loan consolidation lets you combine multiple federal student loans into one new Direct Consolidation Loan offered by the U.S. Department of Education. The interest rate for the new loan is a weighted average of your existing federal student loan interest rates. So, your interest rate may not actually be reduced. 

What are the Benefits of Student Loan Consolidation?

There are several benefits of consolidating federal student loans, including:

• Simpler repayment. Instead of making multiple federal loan payments, you’ll make one monthly payment to one loan servicer.
• Access to federal loan benefits. You’ll continue to have access to eligible federal borrower protections, including deferment and forbearance, and eligible loan forgiveness programs.
• Fixed interest rate. Your new loan will have one fixed interest rate, giving you a predictable monthly payment.

What are the Drawbacks of Federal Student Loan Consolidation?

Now for the other side of those benefits: 

• Your monthly payment may not be lower. Because your interest rate is a weighted average of your current loans, consolidation usually won’t save you money on interest.
• Longer repayment. If you choose a longer repayment term, you could pay more in interest over the life of the loan.
• Loss of some benefits. You could lose borrower discounts or other benefits that were available with your original loans.

What is Student Loan Refinancing?

While federal student loan consolidation is offered by the federal government, student loan refinancing is offered by private lenders, including banks, credit unions, and non-profit lenders like Brazos. Essentially, refinancing allows you to replace one or more federal and/or private student loans with one new private loan.

The interest rate you receive will depend on several factors, including:

• Your creditworthiness
• Your income
• Your debt-to-income ratio
• Current interest rates and the rates offered by the private lender

What are the Benefits of Student Loan Refinancing?

There are many benefits that come with student loan refinancing, including:

• A potentially lower interest rate. If you qualify, you could lower your interest rate, which may reduce your monthly payment and the total interest you pay.
• Simpler repayment. Instead of making multiple federal and private student loan payments, you’ll make one monthly payment to one lender.
• Repayment flexibility. You can choose the loan term that fits your needs. A shorter term may help you pay off your loans sooner and reduce the amount of interest you pay. A longer term may lower your monthly payment, although you’ll likely pay more interest over the life of the loan.

What are the Drawbacks of Student Loan Refinance?

Like student loan consolidation, there are downsides to student loan refinancing. These include:

• Loss of federal loan benefits. If you refinance federal student loans with a private lender, you’ll lose access to federal repayment benefits and forgiveness programs.
• Qualification requirements. Private lenders will review your creditworthiness, income, and debt-to-income ratio before approving your loan.
• Your interest rate may not be lower. The rate you receive depends on market conditions, the lender, and your finances. If you choose a variable interest rate, your monthly payment could rise. 
• Fewer borrower protections. Some private lenders offer hardship assistance and repayment flexibility, while others may not.  

Federal Student Loan Consolidation vs. Student Loan Refinance at a Glance

Which Option is Right for You?

Now that you understand student loan consolidation and student loan refinancing, it’s time to decide which option best fits your financial goals.

Choose federal student loan consolidation if you:

• Want to keep access to federal loan benefits, including eligible forgiveness programs.
• Have multiple federal student loans and want one monthly payment.

Choose student loan refinancing if you:

• Want to potentially lower your interest rate and save money.
• Want one monthly payment with one lender.
• Don’t think you’ll need federal loan benefits.

The important thing to remember is that federal student loan consolidation usually won’t save you money, but it allows you to keep your federal loan benefits. Student loan refinancing, on the other hand, could save you money if you qualify for a lower interest rate, but refinancing federal student loans with a private lender will result in the loss of federal loan benefits. So, before you decide, carefully weigh the pros and cons of each option. 

Brazos has Private Loans that Could Help You Refinance and Save

For more than 50 years, Brazos Higher Education has helped borrowers refinance their student loans. As a Texas non-profit, we offer competitive rates, no fees, flexible repayment options, and cosigner release to help you take charge of your financial future. Contact us today to learn more.