Consolidating Vs Refinancing your Student Loan

Learn the differences between the two options.

Student Loans

If you’ve graduated college and are now looking for ways to lower your monthly debt costs, taking aim at your student loans is a viable option. There are two main methods of reducing your student loan payments that differ in ways many people may not realize. There’s consolidation and then there’s refinancing.

Consolidating Student Loans

Basically when consolidating, you’re combining all of your loans into one single loan where you make one monthly payment. The federal government holds a large majority of student loans and often assigns multiple loans to independent third party servicers to manage loans and collect payment from former students. These companies are able to negotiate interest rates and repayment options for students that may include the consolidation of multiple loans.

It’s important to note, however, that you cannot consolidate Federal loans (Stafford, Perkins or Direct Stafford loans) with private loans. Additionally, they determine the new interest rate by figuring out the weighted average of all the loans being consolidated and rounding up to the nearest 1/8 not exceeding 8.25%.

The benefit of having several loans consolidated into one payment is twofold. First, the convenience of making one payment rather than several different payments each month is helpful for busy individuals who are trying to start a new lifestyle outside of school life. The consolidated lump sum payment is often significantly lower than the total of the individual payments that resulted from multiple different loans. However, since the life of the new loan under a consolidated plan is extended you’ll end up paying more interest.

Refinancing Student Loans

Although the consolidated payment may be lower, the overall terms of the loans are not likely to change. If you want to refinance your student loan to reduce interest rates or reduce the repayment terms there are a few requirements:

  • Banks will often have a minimal credit score requirement
  • Will look at your debt-to-income ratio
  • and will be interested in what your monthly income is

Borrowers must meet the minimum criteria in order to qualify for refinancing because student loans are treated like any other consumer debts. This is why when considering refinancing your student loan, it’s important to check your credit score for improvements. That’s the best way to get a lower interest rate when you refinance a loan. An added bonus with refinancing vs consolidating is that the life of your loan isn’t lengthened, so you’ll receive lower monthly payments (due to a lower interest rate) and a similar loan term to the one you had originally.

Establishing and maintaining a good credit profile is crucial when trying to refinance your student loan or qualifying for any new financial accounts. There are benefits to refinancing versus consolidating student loans but there is no one approach that will meet the needs of every borrower.


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