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Bottom Line Up Front

  • Consolidation and refinancing are key strategies to help you manage your student loans. 
  • Consolidation bundles your federal loans and can simplify repayment plans. 
  • Refinancing can help you access lower rates and savings, but only if you meet requirements.

Time to Read

7 minutes

March 12, 2024

Managing student loans can feel like a full-time job, especially when you start thinking about consolidation and refinancing. The fact is, there are major differences between consolidating and refinancing student loans, and your ability to do one or the other depends not only on the types of loans you have, but also your budget and repayment goals. 

Let’s look at the differences between consolidation and refinancing—including eligibility, processes and financial impacts—to help you make informed decisions about your student loans.

Student loan consolidationStudent loan refinancing
What is the purpose of each?Combine multiple eligible federal loans into one direct consolidation federal loan.Combine private and/or federal loans into one private loan.
Which loans can I combine?Most federal student loans—including direct loans and Federal Family Education Loan (FFEL) program loans—are eligible for consolidation.Private and/or federal loans.
How is interest rate applied?Based on a weighted average of the interest rates on the loans being consolidated.Based on your credit history, income and debt.

A brief recap of federal vs. private student loans 

The types of student loans you have affect your ability to consolidate or refinance them. Before delving into the differences between consolidation and refinancing, it’s important to separate federal and private student loans

  • Federal student loans are issued by the government and typically offer more flexible repayment options, including income-driven plans and forgiveness programs.
  • Private student loans, on the other hand, come from private lenders, such as banks and credit unions, and often have fewer repayment options. 

Your decision to consolidate or refinance student loans not only hinges on the types of loans you have, but also what you want to achieve by modifying your loans.

What is student loan consolidation?

Student loan consolidation is a financial strategy that allows borrowers to combine multiple federal student loans into a single direct consolidation loan. This process simplifies loan management by merging various loans into one, resulting in a single monthly payment.

While consolidation doesn’t lower the interest rate on your loans, it can extend the repayment term, potentially reducing monthly payments. 

  • For instance, if you have 4 federal student loans totaling $40,000 with varying interest rates and servicers, consolidation can combine them into a single $40,000 direct consolidation loan, simplifying monthly payments.

It’s important to note that consolidation is only for federal student loans and can provide access to income-driven repayment plans and loan forgiveness programs. At its core, consolidation is a strategy to streamline repayment and make it more manageable for borrowers with federal loans. 

What is student loan refinancing?

Student and parent loan refinancing allows borrowers to replace their existing student or parent loans (whether federal or private) with a new private loan from a private lender. The purpose of refinancing is to secure more favorable terms or rates—such as a lower interest rate or different repayment options—which could potentially lead to reduced monthly payments and interest savings. 

  • For example, if you have $60,000 in high-interest private student loans with an average interest rate of 12%, refinancing could help you secure a new loan with a lower interest rate of 7%. This new rate could save you thousands of dollars in interest over the life of the loan, while reducing monthly payments from $700+ to $500+.

While refinancing is a convenient option to help lower interest rates, it’s important to remember that refinancing federal loans means forfeiting federal benefits like income-driven repayment plans and loan forgiveness. Borrowers should carefully consider their financial goals before choosing this option.

Financial implications of student loan consolidation or refinancing

Most student loan borrowers consolidate or refinance because doing so will have a positive impact on their financial situation. Here’s what you can expect:

Student loan consolidation

Federal loan consolidation typically doesn’t reduce your interest rate or overall interest costs. Consolidating your current loans could cause you to lose credit for payments made toward Income-Driven Repayment (IDR) plan forgiveness or Public Service Loan Forgiveness (PSLF). However, under the payment count adjustment, you won’t lose credit for those past payments. This adjustment will be applied automatically to all PSLF-eligible direct loans, including consolidated and unconsolidated Parent PLUS loans. However, it offers the flexibility of choosing income-driven repayment plans, which can result in lower monthly payments based on your income. 

Student loan refinancing 

Private loan refinancing can lead to substantial financial benefits, primarily through potentially lower interest rates and adjusted monthly payments. If you qualify for a lower interest rate due to your creditworthiness, you can save money over the life of the loan. You may want to keep in mind that refinancing with a creditworthy co-signer could improve your chances of approval or potentially lower your interest rate. However, be mindful of the temporary impact on your credit score during the application process and the loss of federal benefits (giving up income-driven repayment and PSLF).

The bottom line

  • Consolidating’s primary benefit is access to income-driven repayment options that help you better manage your monthly student loan payments.
  • Refinancing may actually save you money over the life of your loan; however, you’ll need to qualify for better rates and give up any federal benefits you might otherwise be eligible for. 

Eligibility criteria for consolidation and refinancing

Speaking of eligibility, having student loans doesn’t automatically mean you can consolidate or refinance them. To take advantage of these strategies, you need to meet certain eligibility criteria.

Student loan consolidation eligibility requirements:

  • Only federal student loans are eligible for consolidation. Private loans aren’t included.
  • Your loans must be in a repayment, grace or deferment status to be eligible.
  • Borrowers with defaulted loans can consolidate if they meet specific conditions. (Example: Making repayment arrangements or rehabilitating the loan.)
  • You can’t re-consolidate your federal loans unless you include a new eligible loan.

Student loan refinancing eligibility requirements: 

  • Private lenders typically require a good to excellent credit score (650+) for refinancing. 
  • Lenders may use employment history, income and debt-to-income ratio for eligibility.
  • Some lenders may have minimum loan balance requirement thresholds for refinancing.
  • Many lenders require borrowers to have completed an eligible degree program.

It’s a smart idea to understand both your loans and your personal finances before deciding to consolidate or refinance, to ensure you’re eligible and prepared to move forward with your choice. 

How to consolidate student loans

If you’re interested in consolidating your federal student loans into a direct consolidation loan, the process is relatively straightforward.

Here’s how to simplify your loan repayment by merging your loans into one monthly payment:

  1. Gather loan documents. Before you begin the consolidation process, make sure you have your Federal Student Aid (FSA) ID, loan details and loan servicer’s contact information.
  2. Choose a consolidation loan servicer. Visit the Federal Student Aid website ( to select a loan servicer for your direct consolidation loan. Your chosen servicer will handle your consolidated loan moving forward.
  3. Complete the application. Complete the direct consolidation loan application on the Federal Student Aid website. Follow the prompts to enter your loan details, choose a repayment plan and provide any required documentation.

After your consolidation is approved, your new consolidated loan will have a fixed interest rate based on the weighted average of your existing loans. You can choose from various federal repayment plans, including IDR plans. Follow up with your loan servicer for details and instructions on the loan consolidation process.

How to refinance student loans 

The process of refinancing student or parent loans is relatively straightforward. However, it requires a little more work due to the nature of private lender requirements.

Here’s a breakdown of how to refinance student loans to possibly get a better rate:

  1. Research and compare private lenders. Start by researching and comparing private lenders that offer student loan refinancing, like Navy Federal Credit Union. Look for lenders that offer competitive interest rates, multiple term options and good customer service.
  2. Check eligibility. Before you apply for refinancing, check eligibility criteria. Most private lenders have specific requirements for credit score, income and credit history.
  3. Submit an application. Once you’ve chosen a lender, submit a formal application for student loan refinancing. You’ll need to provide detailed information about your existing loans, financial situation and personal information.

After your application is approved, carefully review the terms and conditions of the new loan offered by your private lender. Pay close attention to the interest rate, loan duration, monthly payments and any other terms that may affect your monthly financial obligations.

Should you consolidate or refinance student loans?

At the end of the day, the question is a simple one: should you consolidate or refinance your student loans? While both strategies can help you better manage your financial responsibility, it’s important to know which option is best suited for your situation. 

When to consolidate student loans

When borrowers have multiple federal student loans and are seeking simplified repayment, consolidation can be a valuable option. It’s particularly useful if you want to access federal benefits like income-driven repayment plans and loan forgiveness programs.

When to refinance student loans

Refinancing is a suitable choice for borrowers who have both federal and private student loans and are looking for a lower interest rate. If you’re looking to lower your monthly payment or reduce the amount of interest paid over the life of the loan, refinancing is a great option

The best answer is the one that’s suited to your financial situation and goals. That’s why it’s so important to not only understand your student loans, but also look ahead for how you plan to effectively repay them.

Put yourself in control of student loan repayment

Whether you choose to consolidate or refinance your student or parent loans, Navy Federal is here to support you. We offer a wide range of resources to help you budget for your new direct consolidation loan. Or, if you choose to refinance, talk to us about our different student loan refinancing plans and rates

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This content is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.