Today, the average college student graduates with around $27,975 in student loan debt.

If you took out multiple types of loans with different lenders, you’ll be making more than one student loan payment each month. In order to minimize this extra hassle and possibly save some money, many borrowers look into whether or not they should refinance or consolidate their student loans.

Refinance vs. Consolidation: What Are the Differences?

Although student loan consolidation and refinancing often get grouped together due to their similarities, the details of each activity are important to note. When you refinance your student loans, you take out a new loan that repays an existing loan. You may be able to pay off more than one existing student loan with the new loan, which is why refinancing is similar to consolidation.

In fact, consolidating two or more student loans with a private lender is just a form of refinancing. When consolidating or refinancing with a private lender, you can have private and federal student loans. Consolidating loans with the federal government, however, is different than refinancing. Federal student loan consolidation allows a borrower with more than one federal student loan to combine those loans into one new loan with one monthly payment.

Is Federal Loan Consolidation the Better Choice?

Federal loan consolidation is only available for federal student loans such as Direct or FFELP loans. Private student loans are not eligible for a federal student loan consolidation. 

When consolidating two or more federal student loans, the interest rate on the new loan is the weighted average of the interest rates on the original student loans, so you will not save money due to a lower loan interest rate. When you consolidate your federal student loans, you have the ability to extend the loan up to 30 years.

Extending the loan will lower your monthly payment, but it will also cause you to pay a lot more money in interest over the life of the loan. Eligibility for federal student loan consolidation is not dependent upon a borrower’s credit history or credit score. A major benefit to consolidating rather than refinancing is that you will keep the borrower protections that federal student loans offer – but that many private student loans do not.

Can You Lower Your Private Student Loan Payments?

Is Refinancing the Better Choice?

If you’re refinancing your student loans with a private lender, it can include any combination of private and federal student loans. The borrower’s credit score and credit history, however, do determine whether or not the lender approves the refinancing application. The borrower’s credit history also determines the interest rate on the new loan.

Borrowers with good credit may receive an interest rate lower than they have on their existing loans, so they can save money by lowering their monthly payment. Private lenders usually offer loans with terms ranging from five years to 20 years.

Why Neither Might Make Sense for You

Student loan consolidation and refinancing have a lot of benefits, but that doesn’t mean they are right for you. For example, if you only have one federal student loan, you can’t consolidate and may not be able to lower your interest rate by refinancing with a private lender.

If you may consider seeking federal student loan forgiveness in a public service loan forgiveness program, you won’t be eligible after refinancing your federal loan. If your credit history and credit score are below average, you probably won’t save any money by refinancing your loans.

Finally, if you have a federal student loan and take advantage of one of the graduated payment or income-dependent payment options, you won’t be able to benefit from those repayment options if you refinance the loan through a private lender.

Other Ways to Lower Your Monthly Payment

Federal student loans offer the most options for borrowers seeking to lower their monthly payments. They offer income-driven repayment options that can be helpful to borrowers who are trying to get settled into a career or who find themselves in between jobs. The forbearance provisions for federal loans are also relatively generous to borrowers.

Private lenders don’t offer the ability to choose an income-based repayment option. The only way you can try to lower your monthly student loan payment with a private lender is to set up automatic payment debits from your checking account. Many lenders provide a small interest rate reduction for borrowers who choose this payment option.