Refinancing and consolidation are two completely different types of loan management strategies. In general, it’s better to consolidate your student loans first. To understand why, it helps to know how refinancing and consolidation work and the differences between them.

How Consolidation Works

Consolidation combines multiple student loans into one single loan. The main purpose of consolidation is to simplify monthly payments by keeping track of just one payment and due date every month. Unlike refinancing, you don’t get the benefit of lower interest rates when you consolidate. The interest on the consolidated loan is calculated as the weighted interest of the individual loans that you’ve bundled together. Your new interest rate will stay roughly the same as before.

Consolidation is offered by the federal government. The consolidated loan qualifies for all federal benefits associated with the original loans in the bundle. That means they’ll still be eligible for income-based payments, deferment, forbearance, and forgiveness.

How Refinancing Works

Refinancing involves exchanging one or more student loans for a new student loan. Borrowers may choose to refinance for a variety of reasons. Borrowers with strong finances qualify for a lower interest rate when they refinance. This can help them save thousands of dollars over the loan term. Borrowers who are struggling financially may choose this option to lower their monthly payments. This helps relieve their financial stress and reduce the risk of default.

The one drawback to refinancing is that the federal government doesn’t offer this option. It can only be done through private lenders. When you refinance your federal student loans, they get converted to private student loans. The new loan does not have any of the benefits associated with the original loan. Refinancing federal student loans is advisable only if you’re very sure that don’t need any of the federal protections.

Why It’s Better To Consolidate Your Student Loans First

Both consolidation and refinancing help to simplify payments and make student loans more manageable. The most compelling benefit of consolidation vs. refinancing is that the consolidated loan simplifies payments while still retaining all federal loan protections. You should try and hold on to these protections as long as possible unless the benefits of refinancing outweigh the benefits of consolidation.

It’s advisable to consolidate your student loans first if:

• You’re juggling multiple federal student loans with different payment amounts and due dates. With consolidation, you’ll have one monthly bill to manage while still retaining the original federal loan benefits.
• You have a Federal Family Education Loan that isn’t eligible for federal loan protections. Switching to a Direct Consolidation loan will give you access to federal loan benefits such as income-driven repayment and loan forgiveness.
• You want to transfer your federal loans to a new federal loan servicer that offers better customer service than your current servicer. You can only transfer from one student loan servicer to another by consolidating your federal loans.

When you consolidate your student loans first, you can still choose to refinance later when you qualify for a lower rate. However, refinancing is irreversible. If you choose to refinance first, you’ll lose the consolidation option permanently.