Consolidation versus Refinancing

Consolidation versus Refinancing

There is a lot of confusing jargon in the world of student loans — it’s hard to keep track of it all. There are a couple of terms that often get mixed up and could cause you, the borrower, a serious headache. The word consolidation can mean different things in different contexts. Some people simplify and define consolidation as combination. Combining loans to create a single monthly payment can be a good option to lower payments (but not always, so do your research first).

To get more specific, combining loans is different for federal loans and for private loans. When you combine federal loans it’s called consolidation, and when you combine private loans, it’s called refinancing. The differences are outlined below.

Federal Consolidation

Only federal loans are eligible for federal consolidations. These consolidations are completed through the government. A federal loan consolidation combines all the selected loans into one with a single loan servicer, which you can choose from a list. You will be given a new interest rate that will be the average of all the interest rates of your loans. Generally, you don’t need to consolidate. Though it is a tool that can help simplify your payments if you have more than one loan servicer.

Refinancing (Private Consolidation)

All loan types are available for refinancing. Some people refer to refinancing as private consolidation. Really what you’re doing is having someone buy your loans, similar to when you refinance other loans like auto or home loans. Your account transfers to the new lender, the term starts over and you make payments to the new lender. Refinancing your loans could save you money by getting a lower interest rate and allowing you to pay smaller payments for longer. However, if you refinance federal loans, you lose your borrower protections, like the ability to enroll in income-based repayment plans.

What happens after?

Consolidating or refinancing is irreversible. Before you act, always make sure you fully understand what you’re getting into. If you do a federal consolidation your loan term will start over. If you made any income-driven repayment plan payments that keep track of consecutive payments, they will reset to zero. Refinancing will set boundaries based on the borrower’s financial factors like income and credit score. Before agreeing to any sort of consolidation or refinancing, know what you want to get from the process.