Student loan consolidation vs. refinancing: What are the trade-offs?

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Student loan consolidation vs. refinancing: What are the trade-offs?

According to Edvisors, the average student loan burden for the undergraduate class of 2015 is $35,000. It's likely that amount is spread out over several loans as students often take out new loans each semester or school year. When you start repaying those loans, tracking multiple lenders and payments each month might be a pain, but you can simplify things by consolidating or refinancing your student loans into one new loan.

You may be able to consolidate your federal student loans, which involves combining most or all of your federal loans into one new Federal Direct Consolidation Loan. You'll have one payment each month and one interest rate that's based on your current loans' rates.

Refinancing works in somewhat the same way as consolidation, except private lenders (and not the federal government) offer refinancing of your federal or private loans into one loan. The application to refinance is similar to an application for a new loan and market rates and your financial profile determine the new loan's interest rate.

Both consolidating and refinancing can take away the headache of managing multiple student loans, but there are pros and cons to consider before you apply.

Consolidating Federal Student Loans - Pros and Cons

You can apply to consolidate your federal student loans at


  • You won't be charged any fees to consolidate your federal loans with a federal Direct Consolidation Loan.
  • There's no credit check, and your personal financial situation isn't part of the consideration. As long as you have at least one Direct Loan or Federal Family Education Loan in repayment or a grace period, you're eligible.
  • You can lock in a fixed interest rate. This can help you plan for the future, and if the rates on your loans are low right now, you'll be securing a low fixed interest rate. However, you're also stuck with the locked-in rate even if student loan interest rates drop in the future.
  • You might be able to lower your monthly payments when consolidating. However, this will likely extend the payment period, meaning you'll likely pay more in interest overall.
  • Federal student loans that didn't originally qualify for special programs like Public Service Loan Forgiveness or the Income-Contingent Repayment Plan might be eligible for those programs after they're consolidated into a Direct Loan.
  • Because the consolidated loan is considered a new loan, the three-year limit for deferment or forbearance may be reset. Deferment and forbearance allow borrowers to suspend or reduce their payments under special circumstances, such as unemployment, qualifying active military service or participation in an approved graduate fellowship program.
  • Student loan expert Jan Miller, president of Miller Student Loan Consulting, LLC, says that you can resolve a loan that's in delinquency (one to 270 days past due) by consolidating it. The loan servicers usually report late payments on federal student loans to the credit bureaus after 90 days, which can hurt your credit. Once issued, the Direct Consolidation Loan starts as current even if it's the result of consolidating several delinquent loans.
  • Miller adds that you may be able to consolidate a defaulted student loan (at least 271 days past due) as well. The U.S. Department of Education may require you make satisfactory repayment arrangements on the defaulted loans with the current loan holder or agree to repay the new loan with one of the income-based payment plans before consolidating a defaulted loan.
  • If you don't like your loan servicer, you can pick a new servicer when consolidating. However, keep in mind that that the servicer you choose can always sell your loan to another servicer in the future.


  • Private student loans can't be consolidated with the Federal Direct Consolidation Loan program.
  • The new loan's interest rate will be the weighted average interest rates of the consolidated loans rounded up to the nearest eighth of a percent, which means you'll pay slightly more in interest. This can add up for those that have hundreds of thousands of dollars in student loans.
  • If you lower your monthly payments and extend the payment period, you might pay more in interest over the life of the loan.
  • Consolidated loan payments start about two months after the Direct Consolidated Loan is disbursed, even if some of the consolidated loans were in a grace period.

Refinancing Federal Student Loans - Pros and Cons

Refinancing combines your student loans into a single loan. However, private lenders (not the federal government) refinance student loans and your new interest rate depends on the market rates and your financial profile. You might get different terms depending on which lender you use to refinance.


  • Some lenders let you refinance both private and federal loans into a single new loan.
  • Your new loan's interest rate will depend on market rates and your financial profile. If market rates have dropped, or you have better credit than when you first took out your student loans, you may be able to save money on interest payments over the life of the loan.
  • If you get a lower weighted average interest rate and keep the same repayment period, your monthly payments should go down.


  • Refinancing often requires a credit check and a low debt-to-income (DTI) ratio - you can calculate this by adding all your monthly debt payments divided by your gross monthly income. Commonbond, a student loan refinancer, looks for a DTI that's at least below 30 percent, but ideally is around 20 percent.
  • Lenders may also consider your employment status and educational background.
  • The payment term for refinanced loans is often shorter than for federally consolidated loans. Even if your interest rate decreases, you might have the same monthly payment because the repayment period shortens. In some cases, you might have a higher monthly payment.
  • You'll no longer be eligible for federal programs like Income-Based Repayment or Public Service Loan Forgiveness.
  • Some lending services charge fees to refinance, such as an origination fee equal to a percentage of the new loan.
  • You may lose any special discounts or rebates you had with previous loans.
  • Your new loan might not be considered a student loan, which could prevent you from taking the student loan interest tax deduction. If it's not considered a student loan, it could also have a prepayment penalty, meaning you might have to pay a fee if you pay off the loan before it's due. Before refinancing, check to see whether your new loan will be considered a student loan or not.

Bottom Line

There are many pros and cons to consider before deciding to consolidate or refinance student loans. Either way, you'll simplify the repayment process combining several loans into one. In some cases, you might even save money or lower your monthly payment. However, you could also wind up paying more in interest or voiding your eligibility for flexible repayment programs.

About the Author: Louis DeNicola is a personal finance writer and educator. In addition to being a contributing writer at Credit Karma, you can find his work on MSN Money, Cheapism, Business Insider and Daily Finance. When he's not revising his budget spreadsheet or looking for the latest and greatest rewards credit card, you might spot Louis at the rock climbing gym in Oakland, California.

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