Refinance or consolidate your student loans? The when, where, why and how

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The numbers are simply staggering. Forty-three million Americans owe a total of $1.35 trillion in student loans, and counting. That’s more than 70 percent of recent college graduates, with the average Class of 2016 degree holder facing $37,172 in outstanding student loan debt.

If you’re one among the many saddled with student loans that high, it can feel like you’ll never manage to pay them off in full.

What many borrowers may overlook is that the interest rates, terms and conditions of your loan(s) aren’t set in stone. At some point down the road, you can either refinance or consolidate your loans to better align them with your budget and financial picture.

Yet "refinance" and "consolidate" are two words that tend to get confused with each other. Student loan borrowers may end up pursuing one option when they really need the other, and by doing so, you might further exacerbate your repayment schedule -- instead of help it, sending you further into debt.

Knowing the basic differences -- and the pros and cons -- between refinancing and consolidating your student loans makes it easier for you to choose the right option.

What is refinancing?

Refinancing is like a reboot of your federal or private student loans. With a refinance, you’re taking out a new loan, with a new interest rate, new repayment schedule and different conditions. If your original loan is federal, the new loan will become private; for example, if it’s a Federal Direct Loan (subsidized or unsubsidized), refinancing with a private lender like Earnest or Credible will convert it to a private loan.

Remember that with a refinance, you’ll still owe the same amount of money remaining on your loan, so you’re not off the hook on your total balance; the point of refinancing is to make your loans more manageable by lowering your interest rate and creating new repayment terms.

Student loan refinancing: The pros

Lower interest rates, better terms. Refinancing to a lower APR and securing a more flexible repayment term can lower your monthly loan expenses. While current student loan rates are significantly lower, federal undergraduate loans borrowed prior to 2012 carried a high 6.8% interest rate. Earnest, offers a variable refinance rate starting at 2.23%, and a fixed rate of 3.5% with autopay, a stark rate reduction from that of the original government APR.

You can refinance more than once. If your financial situation changes over time, your refinanced loan terms may not work for you any longer. Exploring another refinance allows you to keep paying your lender on terms that are most suitable to you.

Student loan refinancing: The cons

You’ll lose your federal protections. With federal loans, you can take advantage of income-based and income-contingent repayment plans, loan forgiveness/cancellation eligibility, or the option to stall your payments with a deferment or forbearance. But since refinancing is only available from private lenders, you’ll lose those privileges if you’ve got federal loans.

Your credit might disqualify you. Unlike federal loans, where all borrowers are approved for the same interest rates, getting approved for a private student loan depends on your credit score. If you have poor credit, the interest rate you receive might not be worth refinancing for; likewise, if you have zero credit history, you may be turned down for a loan refinance.

What is consolidation?

Debt consolidation is a method used to combine several federal loans into one brand new federal direct loan through the U.S. Department of Education, with a lower interest rate and terms. Instead of trying to keep up with several loans each month, with varying APRs, payment amounts and other discrepancies, consolidating them into one singular loan allows you to concentrate your debt into one loan, one balance, one interest rate, and one set of terms.

Student loan consolidation: The pros

It simplifies your loan expenses. By combining two or more federal loans into one simple loan, there’s no more need to monitor several payments or interest rates. (Consolidation converts older variable interest rates into one new fixed rate.) Consolidation is also free, so there’s no extra cost attached to applying, fees or other expenses.

You’ll retain access to certain benefits. With a federal consolidation loan, you won’t lose some of the most important options attached to your original loan, like income-based repayment plans, or applying for loan forgiveness if you work in the public sector.

Student loan consolidation: The cons

You might pay more in interest. Consolidation may be convenient, but it may cost you in interest. Consolidated loan rates are calculated by averaging out the interest rates of your old loans and rounding them up to the nearest one-eighth percentage point. Combine that with an extended payment plan, or the possibility of national variable rates dipping below your new fixed rate, and you could be paying more interest in the long run.

Consolidation is a done deal. Unlike refinancing, which you can do over and over again, consolidation is final. If you come to regret the new rates or terms of your consolidated loan, there’s no turning back, so proceed with great caution.

Is refinancing or consolidating the right choice for you?

Refinancing or consolidating your student loans doesn’t make them any less of a financial commitment, so examine all your options and alternatives inside and out before moving forward. Consider some of these suggestions:

Don’t be afraid to pick and choose. The biggest refinance/consolidation myth is the notion of "all or nothing." The truth is that if you have several student loans, you’re not obligated to consolidate them all into one new loan. Carefully look at each one and see which loans impose the most financial burden. You may find that out of five federal loans, you’d like to refinance and/or consolidate three of them. Consulting with various lenders can help you explore and narrow down your options.

Consider keeping federal and private loans separate. Refinancing a private loan to another private loan is a relatively simple switch with a similar loan structure. But some experts discourage refinancing a federal loan, since its transition to a private loan eliminates those built-in benefits designed to make federal student loans easier on you, the borrower. There are some instances where refinancing a federal loan can work, though.

"The only two situations where refinancing federal loans makes sense is if you’re on the standard 10-year repayment plan, can easily make all your payments, plan to into the future, and you won’t be applying for any type of forgiveness program," says Robert Farrington, founder of The College Investor. The second, according to Farrington, is in the event you’d like to refinance, not consolidate, a Parent PLUS loan, since the latter option takes away advantages like income-based repayment.

Look into the future. It’s difficult to predict where life, much less your career, will take you. If you’re relatively confident that your income will increase over the years, refinancing may be a practical option -- but if not, you may want to sit tight with the loans you have currently. You may not need them now, but that income-based or Pay as You Earn plan might come in handy someday.

"Refinancing your student loan is great if you can secure a lower interest rate and lower your monthly payment," says Steve Azoury of Azoury Financial. "Many loans have a 10-year repayment, which is difficult for those who do not yet have a steady income stream. A longer loan repayment plan may make it easier in your monthly budget, as you do not want to get behind. When your income increases, you can then increase your payments to save on some of the interest."

Examine other alternatives. Before letting the thought of refinancing and consolidating enter your head, what are some other solutions to saving money on your student loans? We previously suggested consolidation/refinance only as a final approach to other alternatives. Can you take on a side hustle to earn some extra income towards your loan payments? Have you tried building a budget to find a better fit for your loan payments and your finances? You can also apply to defer or forbear your loans, or better yet, take advantage of saving and budgeting during your student loan grace period before your loans have chance to get out of hand.

Getting started with a student loan refinance or consolidation doesn’t need to be intimidating. A plethora of online resources are at your disposal if you’re teetering on the edge of student loan debt and thinking about refinancing or consolidating. If you have federal loans, the Federal Student Loans portal through the Department of Education is the first place to log in and get started on the steps to consolidate.

If refinancing is your game instead, you might also try visiting for a database of the best private lenders, like Credible, Earnest or DRB. Contact multiple lenders, and make sure to compare and contrast offers to find the best one that does you and your loans justice.