What’s the Difference between Student Loan Consolidation and Refinance?

Facebook icon Twitter icon Print icon Email icon
Mark Kantrowitz

By Mark Kantrowitz

April 8, 2021

Borrowers who consolidate and refinance student loan debt combine two or more loans into one new loan with just one monthly student loan payment, streamlining the repayment process. Consolidation and refinance also provide borrowers with an opportunity to reduce the monthly loan payments by increasing the repayment term. But, there are important differences between consolidation and refinance, such as the impact on interest rates and borrower benefits.

What Happens to Interest Rates When You Consolidate and Refinance Student Loans?


Federal student loan consolidation is provided by the federal government through the U.S. Department of Education. Through this program, the new interest rate is based on the interest rates of your current loans you’d like to consolidate.

Since July 2013, the interest rate for the Federal Direct Consolidation Loan program is the weighted average of the interest rates on the existing loans that were included in the consolidation loan, rounded up to the nearest 1/8th of a percent, without a cap.

The interest rate on a federal consolidation loan is a fixed interest rate.

The use of the weighted average more or less preserves the cost of the underlying loans. There is no credit check required as part of a Direct Consolidation Loan as all borrowers with eligible loans may consolidate their loans with this program.


Refinancing is a private consolidation of student loans through a private lender. Refinancing bases the new interest rate on the better of the borrower’s credit score and the credit score of the cosigner, if any. Lenders use tiering, which maps several ranges of credit scores into specific interest rates.

The interest rate on a private refinance may be a fixed or variable interest rate, depending on the lender. Some lenders offer borrowers a choice of fixed and variable interest rates.

The interest rate on a private refinance may be higher or lower than the current interest rates on the borrower’s loans. Generally, it takes a few years after graduation for a borrower’s credit scores to improve enough that they can qualify for a lower interest rate. The borrower must have a solid credit history, paying every bill (not just the student loans) on time, by the due date. It is also helpful if the borrower has stable employment, sticking with the same employer for at least two years.

If the new interest rate on a private refinance is higher than the weighted average of the interest rates on the borrower’s loans, the new loan will cost the borrower more than their current loans.

If the new interest rate on a private refinance is lower than the highest interest rate on the borrower’s loans, but higher than the interest rates on the borrower’s other loans, it may be better for the borrower to skip refinancing their loans. Instead, they should target the highest-rate loan for quicker repayment. Note that consolidation and refinance prevent a borrower from accelerating student loan repayment of the highest-rate loan.

Which Student Loans are Eligible to Consolidate and Refinance? 


A federal consolidation loan may be used to consolidate only federal education loans, such as Federal Stafford Loans, Federal Grad PLUS Loans, Federal Parent PLUS Loans, Federal Perkins Loans and Federal Consolidation Loans. The borrower must be the same on all the loans included in the consolidation loan.

More than a third of federal student loan dollars are in federal consolidation loans made to more than a quarter of federal student loan borrowers.


A refinance (refi) is available only from private lenders.

Some private lenders will refinance only private education loans, while others will refinance both federal and private student loans.

Be careful when refinancing federal student loans into a private loan, as the new loan will not include the superior benefits and protections of federal education loans. These benefits include low fixed rates, flexible repayment plans, longer deferments and forbearances, death and disability discharges, and loan forgiveness programs.

Change in Repayment Plan

When a borrower consolidates or refinances their student loans, they may have the option of choosing a new repayment term or repayment plan.

A longer repayment term will lower the monthly loan payment, but it will also increase the total interest paid over the life of the loan.

For example, increasing the repayment term on a $10,000 loan with a 5% interest rate from 10 years to 20 years will reduce the monthly payment by more than a third, from $106.07 to $66.00, but will more than double the total interest paid over the life of the loan, from $2,727.70 to $5,838.18. Total payments, including principal and interest, will increase by about a quarter.

Beware: Even though some lenders refer to a lower loan payment as “saving” money, it may actually increase the cost of the loan.

A federal consolidation loan restarts the repayment term. This will yield a lower payment even if the borrower sticks with a standard 10-year repayment term. It can also reset the clock on public service loan forgiveness.

A private refinance may require a shorter loan term for a fixed interest rate, but may be more flexible on the repayment term for variable interest rates.

You could save money by refinancing

A private refinance can save the borrower money, if it results in a lower interest rate. However, most of the savings comes from having a shorter repayment term than a lower interest rate. Borrowers can get the bulk of the benefit by increasing the amount they pay each month.

Our Loan Refinancing Calculator shows you how much you can lower monthly payments or total payments by refinancing student loans into a new loan with a new interest rate and new repayment term.

Consider the pros and cons of student loan refinance before you decide. Refinancing federal loans into a private loan means you will lose all of the federal loan protections, such as income-driven repayment options, potential for loan forgiveness and a generous deferment period if you lose your job or have an economic hardship.

If you decide that student loan refinancing is right for you, check out our list of the best lenders to refinance student loans

Sign up to get the latest student loan tips and news:

* indicates required

A good place to start:

See the best 529 plans, personalized for you