Student Loan Refinancing and Consolidation: Which One is Right for You?

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If you have student loan debt, you have most likely heard the terms “student loan consolidation” and “student loan refinancing”. Although they sound similar and are often used interchangeably, they are actually two different programs. Understanding these programs and the key differences between them can help you make better financial decisions when it comes to repaying your student loans.

Student loan consolidation lets you combine one or more eligible federal student loans into one new Direct Consolidation Loan. The U.S. Department of Education is the new lender, and as administrator of the program, uses companies such as Nelnet to originate and service the loans.

Student loan refinancing is offered by private (non-federal) lenders to allow student loan borrowers to refinance one or more federal and/or private student loans into a new private student loan. The lender of the new private student loan will be a bank, credit union, or other financial institution, with origination and servicing either done by the lender themselves, or by entities like Firstmark Services, a division of Nelnet.

While there are many benefits to both programs, including the ability to simplify your monthly student loan payments, locking in a fixed interest rate, and possibly lowering your monthly payments, there may be some drawbacks as well. For example, if you extend your repayment term, you could increase the total cost of your loans, and you may forfeit current and potential future federal student loan benefits. Also, any incentives that are attached to your current loans, such as interest rate reductions for automatic payments, will be lost.

The table below provides a side-by-side comparison of several important features of student loan consolidation and student loan refinancing.

Student Loan Consolidation Student Loan Refinancing*
Lender U.S. Department of Education Banks, Credit Unions, and Financial Institutions
Credit Check Required No Yes
Upfront Fees None Most lenders do not charge any upfront fees
Interest Rate Type Fixed Fixed and variable rate options are offered by most lenders
Interest Rate Weighted average interest rate of the loans being consolidated, rounded up to nearest one-eighth of 1% Varies: Factors may include the borrower's and/or cosigner's credit history, repayment term, interest rate type, highest level of education, and current market conditions
Repayment Plans Standard, Graduated, Extended, and various Income-Driven Repayment plans Standard Repayment
Repayment Term 10 to 30 years depending on the amount being consolidated 5 to 20 years
Allowable Loans Most federal student loans are eligible. Private loans are not eligible Federal and private student loans are allowed by most lenders
Interest Rate Reduction Rate reduction for automatic payments Rate reduction for automatic payments. Some lenders offer an additional rate reduction to existing customers with a qualifying account
Ability to consolidate or refinance multiple times Generally no, unless additional federal loans are included Yes
Loss of Federal Benefits Some benefits may be lost Yes, including potentially qualifying for Public Service Loan Foregiveness on federal loans
When can you consolidate or refinance After graduation, leaving school, or dropping below half-time enrollment After graduation, leaving school, or dropping below half-time enrollment. Some lenders allow refinancing while in school

* Features represent those of the largest and/or most common private student loan refinancing programs. A specific lender’s features may differ, so be sure to read the program details carefully.

While there are similarities between student loan consolidation and student loan refinancing, they are different programs with unique features. If you are interested in consolidating or refinancing your current student loans, your first step should be to determine what you are looking to accomplish. Your goal may be to lower your monthly payments, lock in a low fixed interest rate, and/or lower your overall cost of repaying your loans. Once your goal has been set, compare the federal government’s Direct Consolidation Loan program to U-fi and other private lender programs, to decide if consolidation or refinancing is right for you based on your financial goals and circumstances.

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