Refinancing vs consolidation

Which option is right for you?

For many with student loan debt, finding the best way to manage payments is a top priority. Two common strategies are refinancing and consolidation. Each offers different advantages and drawbacks, so it’s important to do your research before making any big moves or decisions. Let’s get into some of the basics. 

What’s the big difference? 

You may have heard the terms consolidation and refinancing thrown around—maybe even used interchangeably—but they're not the same. 

Refinancing is like hitting a reset button—you're taking out a new loan to replace/pay off your existing ones. This new loan usually comes with different terms, like a lower interest rate or a different repayment schedule.

Consolidation is like merging all your existing loans together—they’re bundled up and replaced with one new loan with a single interest rate and a new payoff schedule. 

Refinancing: The pros and cons

The pros:

Lower interest rates. If you qualify, you might snag a lower interest rate, which could save you money in the long run.

Lower payments. If you get that lower interest rate, you’ll most likely have a lower monthly payment, which might make your budget more manageable.

The cons:

Lose federal benefits. If you refinance federal loans with a private lender, you'll lose out on potential federal perks like income-driven repayment plans and loan forgiveness options.

Credit check required. To refinance, you usually need a good credit score. If your credit isn't great, you might not qualify for a lower interest rate.

Extended repayment. Refinancing with a different rate may lower your monthly payment, but in some cases, it can extend how long you’re paying—which might mean more interest. 

Consolidation: The pros and cons

The pros:

Simplified payments. Consolidation means you only have one monthly payment and interest rate to worry about.

Access to federal programs. If you consolidate federal loans through a federal program, you’ll keep all the federal benefits of your original loans, like income-driven repayment plans and loan forgiveness options. Remember, if you consolidate with a private lender, you will lose access to these benefits.

The cons:

No lower interest rate. Unlike refinancing, consolidation won't necessarily get you a lower interest rate. In fact, your new interest rate might just be the weighted average of your current rates.

Extended repayment. While consolidation can lower your monthly payment, that might mean extending your repayment term (which means you might be paying more in interest). 

One thing to keep in mind

Both options create a new loan, and in some cases, it removes the cosigner. If you have one, the two of you should have a conversation to make sure that’s something you’re prepared for. 

Considering one of the two? 

You should know that neither option is a guaranteed easy fix. So, before you sign off on a new loan, make sure it’s the best choice for you and your situation.