Student Loan Consolidation or Student Loan Refinance?

refinance student loans

Student loan consolidation or Student Loan refinanceL which should you choose? The decision to consolidate your federal student loans or to refinance your federal and/or private student loans is an important one. Since federal student loan consolidation and private student loan consolidation (aka student loan refinance) are different, it is essential that you understand the differences before deciding which path to pursue.

While consolidation of your federal loans means that you combine more than one loan into a single loan, refinancing means issuing a new loan (and paying off the old loan or loans) with a new (hopefully lower) interest rate and/or loan term.

Student Loan Consolidation

When you consolidate student loans, you can only consolidate your federal student loans.  Consolidation of your federal student loans means that you combine more than one student loan into a single student loan, and the resulting interest rate is a weighted average of the student loans that were combined. With a single monthly payment, you are still afforded borrower protections such as flexible, income-driven student loan repayment plans and student loan forgiveness. More to come on those topics below.

When you consolidate your federal student loans, the federal government assigns you a repayment term. Based on your total balance, the student loan repayment terms vary from 10 to 30 years:

Minimum Age:At least age of majority in your state
Citizenship/Residency:U.S. citizen or permanent resident (applies to co-signer too, if any)
Employment:You are currently employed or offer of employment to start within next 90 days
Eligible Schools:You graduated from a Title IV accredited university or graduate program

You can consolidate your federal student loans with the federal government. Since only federal direct loans qualify for consolidation, if you combine certain other student loans into a direct consolidation loan, you can gain access to the income-driven student loan repayment plans.

  • Doc Benjamins Tip: If you have a Perkins loan and are considering consolidating your Perkins loan, you are better off keeping your Perkins loan outside of your student loan consolidation.
  • Doc Benjamins Tip: The primary reason is that Perkins loans offer certain teacher student loan forgiveness and public service student loan forgiveness programs, and you would lose those benefits if you consolidate your Perkins loan.

How To Apply For Federal Loan Consolidation In 5 Steps:

  1. Create a Federal Student Aid (FSA) ID through Federal Student Aid.
  2. Log on to the National Student Loan Data System (NSLDS) to view your loan types as well as balances and interest rates.
  3. Choose a repayment plan (income-based or basic)
  4. Apply for direct consolidation
  5. Pick a student loan servicer (FedLoan, Great Lakes, NelNet, or Navient)

You can also always call the federal government’s Loan Consolidation Information Call Center at 1-800-557-7392.

What is an income driven repayment option?

Income-Based Repayment Option

The federal government offers four income-based and three basic repayment plans to help you repay your federal loans in a more financially manageable way. Let’s take a closer look to see if any of these options work well for you.

  • Income-based repayment
  • Pay As You Earn
  • Revised Pay As You Earn
  • Income-Contingent Plan

Income-based repayment plans cap your monthly student loan payment based on a percentage of your income. The federal government allows you to repay your federal direct student loans based on your income. After 20 or 25 years, your loan balance is forgiven. In order to apply for any of these student loan repayment plans, you should visit the U.S. Department of Education, or through your loan’s servicer. Also make sure that you apply on time and reapply each year, since you have to update your income information each year in order to qualify.

  • Doc Benjamins Tip: While an income-based repayment plan can lower your monthly payment, remember that it may now take longer to pay off your student loan.
  • Doc Benjamins Tip: So make sure to balance your potentially lower monthly payment with your time goal to repay your loan.

You can learn more about each of these student loan repayment options.

What is a basic repayment plan?

Basic Student Loan Repayment Plan

There are three types of basic student loan repayment plans:

  • Standard Repayment
  • Graduated Repayment
  • Extended Repayment

The basic student loan repayment plans do not depend on your income and you do not need to reapply each year. The default is the standard repayment plan, unless you otherwise choose the graduated or extended plan. The standard repayment plan involves making monthly payments based on your original loan term. If you can afford to make your monthly payments, you are better off staying with the standard monthly plan because you will pay off your loans on time and pay less in interest compared with an income repayment plan.

  • Doc Benjamins Tip: No matter which student loan repayment option you choose, you can pay off your student loan faster by making an extra payment at any time.
  • Doc Benjamins Tip: The more extra payments you can make, the faster you can repay your student loan and save on interest costs. Just remember to tell your student loan company to apply your extra payment to your principal balance, rather than toward your next payment.

Student Loan Refinance

Since the federal government does not refinance student loans, you can think of student loan refinancing as a form of private student loan consolidation – meaning that you refinance with a private lender, rather than the federal government. Many private student loan companies will refinance, though, both your federal and private student loans. When you refinance your student loan, your new lender pays off your existing student loan and issues you a new private student loan.

Unlike a federal government loan, private student loans are credit-based, which means that your credit history and/or credit score may impact the interest rate on your new loan. Private student loan companies use different underwriting models to determine qualifications and interest rates. But you can expect that the stronger your financial profile and demonstrated financial responsibility, the lower your interest rate will be. The good news is that some private student loan companies enable you to have a co-signer (such as a family member), who will assume financial responsibility for your student loan and can help you obtain approval for your student loan application based on their financial profile.

Why Refinance Student Loans?

The primary reason to refinance student loans is the potential to receive a lower interest rate than your existing student loan. Federal student loans may have interest rates as high as 6.8% on an undergraduate student loan, and even higher for a graduate PLUS loan. You may have other private student loans at even higher interest rates that you borrowed while you were a student. Now that you have graduated and have an income and established work history, private student loan lenders are likely to offer you a lower interest rate than these types of student loans.

One downside of refinancing student loans is that you lose federal student loan protections such as income-driven repayment options, Perkins Loan cancellation, and public service loan forgiveness, and teacher student loan forgiveness, among others. However, private lenders have sought to provide relief by offering loan deferment and forbearance options. You can learn more by checking with each lender on the benefits that they offer.

Where can I refinance?

You can learn more about private student loan companies who can offer fixed and variable student loan interest rates as low as 2-3%. Plus, if you sign up for autopay, you can earn a 0.25% discount on your student loan interest rate, which add up to big savings over the course of your student loan.

Flexible Repayment Terms

Private lenders offer borrowers multiple options to repay their loans, with terms ranging typically from 5 to 20 years. You also will have an opportunity to choose between fixed and variable interest rates. If you want to pay off your student loans and get out of debt as quickly as possible, then you will want to choose a shorter-term option (such as 5 years or 10 years).

While you will save on interest costs (compared with a 20-year loan, for example), your monthly interest costs will be relatively higher than with a longer term loan option. However, you may be able to save money depending on how much money you save with your new interest rate.

Summary Comparison: Direct Consolidation Loan vs. Student Loan Refinancing

We often get the question: Which is better – direct federal student loan consolidation or student loan refinancing? Each have their benefits…

Fixed Rate:3.50% - 6.74%
Variable Rate:2.36% - 6.28%
Minimum Loan Amount:$5,000
Maximum Loan Amount:Dental: No maximum
Medical: No maximum
Veterinary: No maximum
Pharmacy: No maximum
Minimum Loan Term:5 years
Maximum Loan Term:20 years
Origination Fee:None
Prepayment Penalty:None
Co-Signer Option:Yes
Co-Signer Release:Yes

Student Loan Refinancing: How To Apply

You can learn more about the top private student loan companies by checking out The 9 Best Lenders To Refinance and Consolidate Student Loans In 2016.


Want to save money on your student loans? These lenders represent our top student loan refinancing picks for 2017, and may be able to help you save thousands of dollars on your student loans by offering lower interest rates and lower monthly payments. That’s real money back in your pocket.

Learn your new student loan interest rate in a matter of minutes.

Student Loan Refinancing – Best of the Best

LenderRates (APR)Loan Terms (Years)Get Your RateLearn More
2.75% - 7.35%5 – 152 minutesSTART SAVING
2.21% - 8.97%5, 10, 15, 202 minutesSTART SAVING
3.89% - 7.45%5, 7, 10, 15, 202 minutesSTART SAVING

*Doc Benjamins is not a lender and does not make loans. We are a free, independent and unbiased website that helps empower borrowers so they can make more informed financial decisions. The rates, terms and other student loan information provided on this website do not legally bind Doc Benjamins or the lenders referenced herein. The rates, terms and other student loan information are estimates and may change periodically and/or differ from your final rate and terms, which may be based on your individual credit profile and other factors as determined solely by the lender. If you would like to apply for a loan, please visit the website(s) of each lender and carefully review their rates, terms and conditions for further information. Average savings is for all customers generally, and not necessarily for this product specifically.