The terms ‘student loan refinancing’ and ‘student loan consolidation’ are often used interchangeably. While they are both popular ways to manage student loans, the similarities largely end there. The best option for you would depend on your unique circumstances and your long-term financial goals.

Are you looking for a way to manage your student loans but are confused if you should refinance or consolidate? Understanding the differences between the two will help you make a more informed decision.

Student Loan Consolidation

Keeping track of multiple student loans with different payment amounts and different due dates can be overwhelming. It also increases the risks of delayed or missed payments, which can be expensive oversights. Every time you miss a deadline, you incur a penalty. In addition, you get a black mark on your credit score, which can have long term consequences.

Student loan consolidation allows you to combine two or more student loans into one. This makes the loans easier to manage as it means keeping track of only one monthly payment and one payment deadline. However, it might not help you save money on the loan interest. The interest on your consolidated loan will be calculated as the weighted average of your current loan interest rates. That means you will be paying about the same interest as before.

Federal student loan consolidation does allow you to combine your federal student loans. However, you cannot consolidate any private student loans through this government process.

Private student loan consolidation allows you to combine both federal and private student loans. However, when you do this, you will lose all benefits associated with your federal student loans.

Pros of Student Loan Consolidation

• Simplifies monthly payments and due dates.
• Minimizes the risk of missed or delayed payments.
• Can repay loan faster.
• Could lower your monthly payments.

Cons of Student Loan Consolidation

• Unlikely to save you money on interest (may actually increase interest rate)
• Could potentially lengthen the term of your loan.
• Can raise monthly payment. 
• Will lose borrower benefits of the original loan.

 

Student Loan Refinancing

When you refinance, you are actually taking a new loan to pay off one or more of your existing student loans. The interest rate on your new refinanced loan will depend on your current credit score. A higher credit score will qualify you for a lower rate of interest.

You can refinance both federal as well as private student loans. You can even combine both into one refinanced loan. The important thing to know however, is that there is no federal student loan refinancing. That means you cannot refinance your federal student loans through government processes. If you want to refinance federal student loans, you will have to do it through a private lender. The downside is that this will convert your federal student loans into private loans. When this happens, you will lose all the perks associated with your federal student loans.

Pros of Student Loan Refinancing

• Can get a lower interest rate.
• Possibility of a shorter loan term to repay debt faster.  
• Simplifies monthly payments.
• Minimizes the risk of delayed or missed payments.
• Potential for cosigner release.

Cons of Student Loan Refinancing

• May not qualify for lower interest rates. 
• Will lose federal benefits.
• Hard credit check will affect your credit score.

Is Student Loan Refinancing or Consolidation Better For You?

As you can see, both student loan refinancing and consolidation have their pros and cons. Which is better for you will depend on your financial circumstances. Here’s how to decide which is the better option for you.

Consolidation may be a better option for you if you:

•  Are juggling multiple student loans and want to simplify the payments.
  
• Want to change your monthly payment amount or the overall length of your loan term.

Refinancing may be a better option for you if you:

• Want to change / lower your interest rate.
• Have a credit score that qualifies you for lower interest rates.
• Are willing to forfeit federal loan benefits.
• Want to change your monthly payment amount or the overall length of your loan term.
  

Before you refinance or consolidate your student loans, consider your reasons for choosing either of these options. Also consider your monthly income and expenses as well as your long-term financial goals. Weighing all of these factors will help you make a decision that’s right for you.