Pros and Cons of Student Loan Consolidation and Refinancing

When it comes to managing student loans, two terms often come up: consolidation and refinancing.

They might sound similar—both involve combining—but they work in very different ways and are dependent on whether you have federal student loans, private student loans or both. Knowing how each one functions can help you make the best choice to meet your financial goals.

Student Loan Consolidation

Through the U.S. Department of Education, you can consolidate multiple federal loans into one new loan, called a Direct Consolidation Loan. Instead of juggling several payments, you’ll only have one.

Here’s how it works: your new interest rate isn’t lower; it’s the weighted average of each loan’s current interest, rounded up slightly. The real benefit of consolidation is that you keep all your federal protections, such as Public Service Loan Forgiveness (PSLF), Income-Driven Repayment (IDR) plans and options like deferment or forbearance. You may also be able to stretch out your repayment term to lower your monthly payments, although that can mean paying more interest over time.

Think of consolidation as a way to simplify and keep your federal safety nets intact, not as a way to save money on interest.

Student Loan Refinancing

Refinancing is handled through a private lender, not the federal government. When you refinance, you apply for a brand-new private loan to pay off your existing ones, whether they’re federal, private or a combination of the two.

The benefit here is the possibility of receiving a lower interest rate, depending on your current credit score, income, financial history and other possible factors. Refinancing can also give you new repayment terms, sometimes as short as five years or as long as twenty. Plus, it can roll both federal and private loans into one, leaving you with a single monthly payment and servicer.

If you plan to refinance federal loans, it’s important to consider that once refinanced, they’re private for good, meaning you lose access to PSLF, IDR and other federal programs or benefits.

Refinancing works best for borrowers with strong credit and a stable income who don’t need those benefits and want to save money or pay off debt faster.

Which One Is Right for You?

So, how do you decide? Think about your goals and unique situation.

If all of your loans are federal and you’re mainly looking for simplicity while keeping access to loan forgiveness or income-driven repayment, consolidation may be a good path for you to consider.

If you have got high-interest private or federal PLUS loans—or a mix of federal and private loans—and you have strong credit and income, refinancing could save you money over time. It’s especially appealing if you're not relying on PSLF or IDR and want to restructure your debt with better terms and only be required to make one student loan payment each month.

Final Thoughts

Consolidation is about streamlining federal loans, while refinancing is about restructuring your debt for potential savings or flexibility. The right choice depends on your loan types, financial stability and whether federal protections are important to you.

If you’d like to learn more about refinancing, Higher Education Servicing Corporation offers refinance loans ranging from $7,500 to $200,000, with an interest rate discount when you set up automatic payments. Explore your options, compare interest rates and see if refinancing could be a smart step toward your financial goals!