Find My Rate

Refinancing vs Consolidating Student Loans: What You Need to Know to Save

Published on

Difference Between Refinancing and Consolidating Student Loans

Refinancing vs consolidating student loans is a decision that many college graduates are making, and only one of these options can reduce your interest rates. The words consolidation and refinancing are often used interchangeably in reference to student loans. But there are key differences you need to be aware of to decide which option is best for you.

In general, what you need to know is that consolidation is a benefit of refinancing with a private lender and that federal consolidation is a program offered by the government for federal loans only. Let’s take a closer look.

Refinancing vs Consolidating Student Loans

Student Loan Refinancing:

Refinancing can lower your interest rate and get your loans on a more favorable term. Student loan refinancing is offered by private lenders, and your new interest rate is determined by your financial profile – usually your FICO credit score. When you refinance more than one loan with a private lender, multiple loans are combined into one loan (this is the part of refinancing that is called loan consolidation).

The only way to lower your interest rate on your federal loans is to refinance your student loans. Federal loan providers do not check your credit when offering loans, which is a great program for those seeking education at 18, but after you graduate and your finances improve, you can often qualify for a lower rate.

You can refinance private or federal loans and you can pick and choose which loans you want to refinance. Refinancing is typically best for those who have launched their career, have good job security, and likely won’t need the benefits from the federal programs. PenFed has created a simple calculator to help you see how much you can save by refinancing your student loans.

Benefits of refinancing:

  • Lower your interest rate to save money over the life of the loan
  • Potentially pay off your debt faster with a new term
  • Consolidate all your loans to one simple monthly payment

Federal Consolidation:

Federal consolidation combines all your federal loans into one, but they are not refinanced. If you have federal loans and you would like to get on one monthly payment, the federal government offers a direct loan consolidation program. But you can’t combine these loans with any private loans you have, as part of this process.

You will get a new rate with federal consolidation, but it is the weighted average of all your old loans you are consolidating (rounded up to the nearest one-eighth of 1%). Make sure you know what repayment plan you are on, because if you consolidate, you forfeit the benefits on some federal programs and your payment plan will switch. You cannot un-consolidate once you consolidate with the federal program.

You can consolidate your student loans through the federal website at no cost. If you ever have a service trying to charge a fee to consolidate federal loans, that’s a scam. Also, keep in mind that because the rate is based on the weighted average of your previous loans, you’re unlikely to save money through a federal consolidation—it’s just about simplifying and making payments easier.

Benefits of consolidation:

  • One simple monthly payment for all your loans

Consolidation when Refinancing with PenFed:

Consolidating comes automatically with refinancing several loans into one. By refinancing your student loans with PenFed, you will get all your loans on one plan so you don’t have a separate monthly payment for each loan. Consolidating with PenFed is really just a benefit of refinancing, not a separate option.

We hope this has cleared up the difference of Refinancing vs Consolidating Student Loans. Now that you know the difference, you can use this information to save on your student loans and make the right choice for you. If you still have questions, contact us.

We are always happy to help you take steps towards saving money on your student loan and finding the refinancing plan that works best for you.