Do you want to consolidate or refinance your student loans? Here’s what you need to know.

source: Navient

After choosing and attending a school, deciding how to finance your education, and finishing your degree, you might encounter one more important decision as you begin repayment: whether to consolidate or refinance your student loans. While these terms are often used interchangeably, they’re different. If you’re exploring these options, here’s what you need to know.

Let’s start with this question: What is the difference?

Student loan consolidation usually refers to a program for federal loans only. It’s a government program through the U.S. Department of Education that allows you to combine one or multiple federal student loans into a single federal Direct Consolidation Loan. Refinancing, on the other hand, typically allows you to combine federal or private loans into a single private education refinance loan. It is offered by banks, credit unions and online lenders.

It’s not unusual for student loan borrowers to leave school with multiple loans, depending on how often they decide to borrow. Both options can help you simplify the repayment process by combining multiple student loans into one loan.

What are the benefits of each option?


A primary reason to consolidate your federal student loans is to qualify for certain income-driven repayment plans. If you borrowed before July 2010, your loans may have been made under an older federally guaranteed student loan program, known as Federal Family Education Loans (or FFEL), which are only eligible for income-based repayment (IBR) and income-sensitive repayment (ISR). Only Direct federal student loans are eligible for other repayment plans, such as income-contingent repayment (ICR), Pay As You Earn (PAYE) or Revised Pay As You Earn (REPAYE).

Similarly, FFELs do not qualify for Public Service Loan Forgiveness, but they may become eligible if you consolidate them into a Direct Consolidation Loan. This benefit may be important to you if you work for a qualifying nonprofit or government organization.

Loan consolidation is also one option to help borrowers who are struggling with repayment. If your loan is in default (after missing payments for 270 days), you can get out of default by consolidating your defaulted federal student loan. Once you’re in good standing, you’ll be eligible for payment programs that could lead to loan forgiveness. You’ll also be eligible to receive additional federal student aid if you’re returning to school.


The Department of Education provides approximately 90 percent of the student loans borrowed each year through its federal Direct Loan program. However, once they enter repayment, some borrowers choose to refinance through a private lender. Depending on your personal finances and credit score, refinancing a student loan may allow you to take advantage of improved personal finances in a competitive refinancing marketplace. After graduation and with a few years of professional experience — and more proof of financial stability — lenders may offer you a new private education refinance loan at a lower interest rate, which could save money over the long term. That’s the major benefit of refinancing.

What are the downsides?

Before deciding, it is important to think carefully and fully understand what you might be giving up.


Most notably, you will lose credit for any payments made towards income-driven repayment plan forgiveness or Public Service Loan Forgiveness before you consolidated your federal loans.

Also, consolidating your federal student loans may not get you a lower interest rate. Your consolidated interest rate would be the weighted average of all the interest rates of the loans you are combining.


Refinance products are generally for borrowers with stable employment, a strong repayment history or other credit-worthy characteristics. They may not be an option for borrowers who are experiencing financial difficulty.

If you choose to refinance your federal student loans through a private lender, you will give up federally subsidized interest, benefits of federal income-driven repayment, deferment and forbearance entitlements. Options that the federal government provides for hardship in repayment, like deferring loan payments while being unemployed, are typically unavailable for loans underwritten by a private lender.

Refinancing can also have specific impacts for borrowers with professional considerations in repayment, such as government workers, teachers, or employees of certain nonprofit organizations. When these borrowers refinance their loans outside of the federal program, they are no longer eligible for Public Service Loan Forgiveness and Teacher Loan Forgiveness programs, for example.

If you’re a service member and you refinance or consolidate your loans while serving on active duty in the military, you will lose the ability to qualify for an interest rate reduction under the Servicemembers Civil Relief Act for all federal and private student loans applied for prior to the start of your service.

How do I know if consolidation or refinancing is right for me?

The decision whether to consolidate or refinance depends on your unique financial circumstances, employment and income stability, and repayment goals. Many borrowers who consider these options are looking to simplify repayment. Consolidation is also important to access certain federal loan benefits. Refinancing allows borrowers to capitalize on improving financial health after they have completed their degree and started working. Improved financial standing means that these borrowers can qualify for a new loan with private sector underwriting standards, which are not applied in the federal loan process.

It’s an important decision that can be affected by several personal factors. You should carefully consider the pros and cons. Making an informed decision can take time, but it is worth the consideration to determine whether consolidation or refinancing student loans meet your goals to financial success.

Nikki Lavoie is a national spokeswoman for Navient, which helps more than 12 million customers successfully manage their student loans.

Navient helps its clients and millions of Americans achieve financial success through services and support.