Student loan refinancing vs. consolidation: Everything to know

Student loan consolidation can make debt easier to repay but there's a difference between consolidating and refinancing your loans.  (iStock)

If you borrowed money to go to school, chances are good you have more than one loan. In fact, you may have several federal student loans as well as some private loans. Juggling them all can become expensive and complicated but you have options including debt consolidation and student loan refinancing.

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Debt consolidation has a specific meaning in the context of student loans. It means taking a Direct Consolidation Loan from the Department of Education and it's an option for federal student loans only. Refinancing can have the effect of consolidating debt and you can refinance both federal and private loans. But student loan refinance loans are available only from private lenders so you'd be giving up federal loan benefits if you include them in a refinance.

What is student loan debt consolidation?

Both student loan refinancing and loan consolidation involve taking out a new loan to repay one or more existing loans, leaving you with just one lender to repay. But while refinancing can change the interest rate on your loan, consolidation doesn't -- the rate on your new Direct Consolidation Loan is a weighted average of loans you consolidated.

STUDENT REFINANCING RATES GOING DOWN - HERE'S WHY

Only federally-guaranteed student loans can be consolidated, including Direct Subsidized and Unsubsidized Loans and PLUS Loans. You'll keep federal loan protections, including flexibility to change your payment plan and access to income-driven plans. In fact, a Direct Consolidation Loan offers more options including extended payment plans lasting up to 30 years and income-driven payment for Parent PLUS Loans that would otherwise be unavailable and that are necessary to access Public Service Loan Forgiveness.

A Direct Consolidation Loan won't make repayment cheaper, though, even though choosing an extended plan can lower your monthly payment. Stretching out your repayment timeline actually increases total repayment costs if you opt for an extended plan because you pay interest over a longer time.

How does student loan consolidation compare to refinancing

Student loan refinance loans are offered through local banks, credit unions, and online lenders rather than the federal government. You have to qualify based on credit score and income and the interest rate on your new loan depends on your financial credentials. If you have good credit, you may be able to get a lower rate than the debt you're refinancing, which would reduce total repayment costs.

If you qualify, your refinance loan can be used to repay all current educational debt so it will have the effect of consolidating it. But while you can refinance federal loans as well as private loans, you'd lose your borrower benefits. Unless you're sure you won't use them, it rarely makes sense to include federal student loans in a refinance even if you could qualify for a lower rate.

Your refinance loan can also change your repayment timeline, but with the same caveat that extending your repayment increases total loan costs.

How to apply for debt consolidation

You can apply for a Direct Consolidation Loan on the Federal Student Aid website after logging into your account. You'll need to provide some basic information including:

  • Your name, address, Social Security number, phone number, date of birth, and email address.
  • Your employer's name and address.
  • Contact details for two adults who can serve as references and who you've known for at least three years.
  • Details on the loans you want to consolidate, including the loan type, name and address of the servicer, and the amount you owe.
  • Details on loans you don't want to consolidate so they can be considered when your maximum repayment period is determined.

If you want to use a private refinance loan to consolidate your debt, you can submit an online application with the lender of your choosing. You'll need to include similar details but should also expect to provide proof of income and go through a credit check.

WHEN TO REFINANCE YOUR STUDENT LOANS

Should you consolidate or refinance your debt?

Student loan debt can be a major burden, especially in some parts of the country. If you're worried about your ability to repay your student loans, refinancing or consolidating could help. But you need to consider the pros and cons, including potentially giving up important benefits if you refinance federal loans.

If you've done your research and decided to move forward, always comparison shop for the right private lender as, unlike with a Direct Consolidation Loan, your rates and terms could vary dramatically from one lender to the next.