Consolidating and refinancing are two different processes with completely different implications. You may choose to consolidate or refinance your student loans separately. Alternatively, you may choose to consolidate AND refinance your student loans. Each option has its own pros and cons. Understanding how each one works and its pros and cons are key to choosing the best option for you.

What Is Consolidation And How Does It Work?

Consolidation bundles multiple loans into one single loan. This makes it easier to manage loan payments as you have to keep track of just one loan amount and due date. The interest rate on the consolidated loan is calculated as the weighted interest of the bundled loans.

Consolidation is usually applicable to federal loans only. The biggest benefit of consolidation is that you protect the benefits associated with the loan. With the consolidated loan, you can still access repayment options, federal loan protections, and forgiveness programs.

The downside is that you don’t save money with consolidation.

Consolidation is a good option if you’re looking for a way to make loan payments more manageable. It also helps if you want to change federal loan servicers.

What Is Refinancing And How Does It Work?

Refinancing replaces one or more student loans with a new loan. The new loan has completely different terms, conditions, and interest rates. You can bundle federal and private student loans together when refinancing. However, refinancing converts all loans, federal and private, into private loans. The main purpose of refinancing is to change the terms of the old loan.

The biggest benefit of refinancing is the ability to change the loan terms. You can save money if your credit score qualifies for a lower interest rate. You can also clear your loan faster by choosing higher monthly payments on the refinanced loan. Alternatively, you can lower your monthly payments if you’re struggling financially.

The downside is that you’ll lose access to all protections, repayment options, and forgiveness programs associated with federal student loans.

Refinancing is a good option if you’re looking to save money on your loan or change the terms of your loan. When it comes to private loans, you have everything to gain and nothing to lose with refinancing. With federal student loans, you should only consider refinancing if you’re absolutely sure you won’t need any of the protections.

How Does Consolidating AND Refinancing Work?

Consolidating and refinancing your loan involves combining multiple loans into one loan with a private lender. This can be any combination of federal and private student loans.

Consolidation by itself involves combining two or more loans into one loan. Refinancing can be done with one loan by itself or by combining two or more loans. Keep in mind, when you refinance two or more loans, you’re technically consolidating AND refinancing your loans in a single process.

The benefits include easier loan management and the ability to change the terms of the original loan. The downside is that you’ll lose the perks and protections associated with your federal student loans.

Should You Consolidate AND Refinance Student Loans?

There are no downsides to consolidating and refinancing private student loans provided that you’re getting better terms and a lower rate on the refinanced loan.

With federal student loans, you stand to lose the associated benefits. You shouldn’t consolidate and refinance federal loans if you’re struggling financially or pursuing any of the forgiveness programs. The income-based repayment loans and deferment or forbearance options can be of tremendous help if your finances are unstable.