Student loan refinancing or consolidation: What’s the difference?

A woman in blue medical scrubs holds open a glass door, smiling at the camera.

With the increased rate of inflation and rising costs of education, many medical students are burdened by the loads of student debt that seem impossible to pay off. But – there’s always a solution to every problem. So here we present you with two alternatives to help you pay off your student loan.

This post will explore student loan refinancing and student loan consolidation and hopefully help you discover which is the better option for you.

What is Student Loan Refinancing?

This financial solution is designed to assist borrowers in effectively managing their student debt. Refinancing involves getting a new loan from a private lender to repay your current student loans.

Ideally, this new loan would have more favorable terms, like a lower interest rate, improved terms, and
more flexible repayment options. The interest rate you receive will be determined by factors such as
your lender, credit history, income, debt level, and other relevant considerations.

You cannot refinance federal student loans through the U.S. Department of Education. Private lenders may refinance Federal and non-federal student loans. If you’re considering whether or not to refinance your federal student loans with a private lender, remember that doing so would mean giving up eligibility for perks like debt forgiveness.

The Primary Goal of Refinancing: Securing a Lower Interest Rate

The primary objective of SLR is to secure a lower interest rate compared to the original loan.

A lower interest rate can help you have significant savings over time. Let’s say you have a debt of
$30,000 with an interest rate of 7% and a repayment term of 10 years. If you refinance at a 5% interest rate, which is considered quite favorable, you could save approximately $3,600.

To be eligible, having a good credit score (preferably in the high 600s or above) and a debt-to-income ratio below 50% is generally important. If you decide to wait before refinancing, work hard and surpass the required benchmarks. This will increase your chances of securing the best possible deal when applying.

Moreover, when the interest rate is lowered, a greater portion of each payment is allocated toward reducing the original loan amount. This helps borrowers to repay their loans faster.

What are the Benefits of Student Loan Refinancing?

Here are the various advantages of SLR:

  • Reduced Monthly Payments: A lower interest rate often results in smaller monthly payments,
    making it easier for borrowers to manage their finances.
  • Potential Savings: By paying less interest over the life of the loan, borrowers can save a
    a substantial amount of money.
  • Simplified Repayment: Refinancing can consolidate multiple loans into a single loan,
    simplifying the repayment process.
  • Choice of Terms: Borrowers may have the option to choose different repayment terms, such as a
    shorter or longer loan duration.

What are the Potential Downsides of Student Loan Refinancing?

While student loan refinancing can be advantageous, there are potential downsides to consider, such as:

  • No Federal Benefits: Loan forgiveness, postponement of payments, and other possibilities are
    common benefits of federal loans. Refinancing with a private lender might result in the loss of these benefits.
  • Credit Impact: A hard inquiry on your credit report from applying for a refinance might
    temporarily reduce your score.
  • No Federal Protections: Private loans lack the protections and flexibility than federal loans
    offer during financial hardship.

What is Student Loan Consolidation?

Student loan consolidation is a helpful process that enables borrowers to merge several student loans into a single new loan. It replaces all the existing loans with a single loan, usually with a lower interest rate and extended repayment terms.

Primary Goal of SLC: Simplifying Repayment Through Consolidation

The main objective of consolidation is to make repayment easier by merging multiple loans into a single one. Using this, you won’t have to worry about keeping track of various lenders, remembering due dates, or calculating payment amounts. It simplifies managing your financial responsibilities, making it more convenient for you to stay organized.

What are the Benefits of Loan Consolidation?

  • Having just one monthly payment can be helpful because it reduces the chances of missing payments or feeling overwhelmed by multiple bills.
  • It enables borrowers to extend the time to repay their loans, resulting in reduced monthly payments.

Federal Loan Consolidation vs. Private Loan Consolidation

  1. Federal Loan Consolidation: This option is available for federal student loans and is managed
    by the government. The interest rate is calculated by adding up the outstanding balances of all the loans in the consolidation and rounding up to the closest eighth of a percentage point.
  2. Private Loan Consolidation: Private lenders facilitate this consolidation for private student
    loans. Interest rates and terms vary based on the lender. Borrowers with strong credit might secure lower rates, potentially saving money. However, it could lead to the loss of federal loan benefits.

What are the Downsides of SLC?

  • Consolidation might not always result in a lower interest rate, especially if the weighted average rate is higher than the borrower’s current rates.
  • When you choose private consolidation, you must give up certain benefits that come with federal loans, like the ability to have your loans forgiven and the flexibility of repayment plans.

Summary: Refinancing vs. Consolidation

Refinancing and consolidation are ways to manage multiple loans, but they have different purposes and results.

Factors Student Loan Refinancing Student Loan Consolidation
What is it? Replacing previous loans with a new one. Combining multiple loans into a single one.
Objective Getting a lower interest rate can save you money over time. To simplify payments by having only one monthly payment instead of several.
Outcome You’ll have a single loan with a new interest rate and potentially a new repayment term. It doesn’t lower your interest rate.
When to consider it? Consider SLR if:
  • You have private loans
  • You already have federal loans and can afford to lose any federal loan benefits
Consider SLC if:
  • You have federal loans
  • You want to retain federal benefits like deferment, forbearance, and income-driven repayment
    (IDR) plans.

How to Decide if Student Loan Refinancing or Consolidation is Right for You?

Deciding whether to pursue student loan refinancing or consolidation can be challenging. Thinking about your situation
before deciding is important because both options have pros and cons.

● Are You Struggling Financially?

I suggest you carefully examine your current financial situation. Are you struggling to make the monthly payments on
multiple loans? If so, consolidation might be the right option for you. When you consolidate all your loans into one,
you’ll only need to focus on making a single monthly payment. Using this method could make it easier for you to repay
your loan and might even result in a lower interest rate.

● Are You Financially Stable?

Refinancing could be more beneficial if you’re financially stable but looking for ways to save money in the long run.
Refinancing involves taking out a new loan with better terms than your current one. This could result in a lower
interest rate or reduced monthly payments, allowing you to pay off your debt faster.

● What Are Your Terms For Payoff?

Consider how each option will impact your overall financial goals as well. Are you considering paying off your loans
sooner, or are you okay with taking more time to repay them? Understanding these factors will help guide your
decision-making process.

● Type of Loan

Another important factor is the type of loans you have. Some advantages of federal student loans, such as income-based
repayment plans and forgiveness programs, may not be available from private lenders after refinancing.

● Future Job

Also, consider any possible future changes, like job stability or your career goals, that might impact the money you can
set aside for monthly loan payments.


Both refinancing and consolidating student loans provide advantages for individuals searching for better methods to handle their student debt. However, the best option for you will depend on your unique circumstances. It is suggested to consult with a financial advisor or a trusted lender specializing in student loans to evaluate all available options.

When figuring out if student loan refinancing or consolidation is the best choice, it’s important to consider things like your current financial situation, what you want to achieve, and what you prefer.

So don’t let overwhelming student debt hold you back from achieving your dreams – explore the possibilities of refinancing or consolidating today!

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