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What’s the Difference Between Consolidating & Refinancing?

Marcela OteroMar 10, 2017

Essentially, there is no difference between consolidating and refinancing your debt, and many companies actually use the two terms interchangeably. Whenever you refinance more than one loan, you’re consolidating them. When considered more closely, however, you’ll find that both terms actually describe subtly different processes.

Consolidating primarily refers to merging various loans into a single loan via the U.S. Department of Education. This is called Federal Loan Consolidation, and the new interest rate is the weighted average of your old loans’ rates. While it can greatly simplify loan repayment by combining your payments into one bill and lower your monthly repayment amount by extending the life of the loan for up to thirty years, this option only applies to federal loans. It’s also important to understand that the consolidation process cannot be undone, may not lower your interest rate, and you may end up paying a lot more in interest over the life of the loan.

How does Federal Loan Consolidation work?

  1. For starters, head over to the National Student Loan Database to find out exactly what you owe in federal loans and to whom. Keep in mind that these balances may be 120 days old, so verify the numbers with your loan providers.

  2. You’ll need to choose a new repayment plan and federal loan servicer (this should be done beforehand, to simplify the process). You’ll have the choice of the following servicers: FedLoan Servicing, Great Lakes, Nelnet or Navient. If you already have a loan from one of these, it might be best to stay with them, so you don’t have to transfer all your loans. As a side note, if you’re looking to enroll in the Public Service Loan Forgiveness program, you must choose FedLoan Servicing.

  3. The web page even has a useful Repayment Estimator that’ll help you calculate your monthly payment with each repayment plan.

  4. Then, apply online at, by logging in with your Federal Student I.D. and completing the application (set aside a bit of time for this, as it needs to be completed in one go).

  5. If you’re looking for an income-driven plan, you’ll have to fill out an Income-Driven Repayment Plan Request when you apply.

What are the benefits of Federal Loan Consolidation?

  • It may allow you to enroll in repayment plans you might not be eligible for an other way. For example, consolidating loans from the Federal Family Education Loan Program makes them eligible for income-driven repayment, which forgives your balance after 20-25 years, and ties your payments to a percentage of your earnings. Loan consolidation can also let you apply for loan forgiveness, which dissolves your debt after 120 consecutive payments, if you’re working in public service.

  • If you have a significant number of loans from different providers, at wildly different interest rates, consolidating them reduces everything into one single monthly payment.

When shouldn’t I consolidate?

  • No matter what, if you extend your repayment term when you consolidate, you’ll pay more in interest. This can be offset by simply paying larger amounts each month, over the minimum, especially as these loans don’t have early repayment penalties.

  • If you choose an income-driven plan, and your income shoots up, your payment could increase from what you would normally pay.

  • Consolidating may cause you to lose your Perkins Loans cancellation benefits. Consider keeping these separate if you consolidate, and make sure that you won’t lose any other benefits. If you have any questions or worries, you can call the Federal Student Aid’s Loan Consolidation Information Call Center at 1-800-557-7392.

  • If most of your student debt is from private loans, then this is not the option for you, as Federal Loan Consolidation is only available for federal loans.

  • Since federal loans can all have different interest rates, and consolidating weighs their average to give you a new, fixed rate, rounded up to the nearest 1/8th of 1%; your interest rate won’t really go down as dramatically as if you refinanced with a private lender, (more on that soon).

Loan refinancing, or private student loan consolidation, replaces various loans (private and federal), with one single loan. Just as with any other private loan, lenders look at your entire financial history (credit score, employment history, bank accounts and educational background), and have fairly stringent requirements, as you’re not really putting up any collateral.

How do I refinance?

  1. Start the same as with loan consolidation and figure out precisely how much you’re in debt for. Since your original private loans may have been sold to other servicers, make sure to find out who currently owns them. Your school’s financial aid advisor may be able to help you with that.

  2. Shop around. Compare different lenders, and make sure to look at more than the interest rates they offer. Since refinance will definitely eliminate the benefits of your federal loans, see if any of the lending companies have similar ones. Some have programs for deferment, hardship provisions, or flexible repayment.

  3. Find out the lenders’ requirements and get all your paperwork together. If you’re pre-approved after the initial inquiry into your credit, lenders are going to perform a hard pull. While this normally affects your score negatively, especially after multiple pulls, if they’re done within a 30-day period, they all count as one. Start applying!

What are the benefits to refinancing?

  • Just as with federal consolidation, refinancing joins all your payments into one, easy to manage bill.

  • You can lower your interest rate considerably, as well as the terms of your loan, which results in both paying it off quicker and putting more towards the principal.

  • Refinancing can be a great option if your credit is excellent, and you have fairly good chances of your income increasing and remaining steady during the foreseeable future. If this sounds like you, a company with flexible repayment can be a great idea.

  • Maybe a large part of your loans were given to you with a cosigner, and you’d like to release them from the obligation. If you refinance on your own, your cosigner is off the hook, and won’t have the financial drain of your loans on their credit report.

What are the possible drawbacks to private refinance?

  • Some companies charge percentage points of your loan, as origination fees, of anywhere up to two percent. When calculating the possible savings you could accrue with refinancing, be sure that these fees don’t outweigh the benefits.

  • Don’t fix it if it ain’t broke: if your loan balance is relatively low, you’re close to the end of the term, and you feel confident in being able to continue making your current payments, then there really isn’t any point in refinancing.

  • If refinancing is going to extend the life of your loan, you could end up paying a lot more in interest, even at a lower rate.

  • As we mentioned before, refinancing could make you lose the perks associated with your current loans, especially if they’re federal.

Summing up, both federal consolidation and private refinancing can be excellent choices in guaranteeing your future financial health. The most important thing is taking a long, hard look at your debt and why you want to change it, before looking at either option. Then, read our reviews for the Top 10 student loan refinance companies of the year, so you can compare who our editors rate highest & determine which option is right for you.