Student loan refinancing, student loan consolidation, and the federal “Direct Consolidation Loan” are all ways to take your old student loan or multiple loans and turn them into a new one.
Student loan refinancing is the process of taking a new student loan with a private lender to cover an old loan and potentially get better interest rates and lower your monthly payments. Student loan consolidation is a type of refinancing that combines several private or federal student loans, so you make only one payment each month.
A “Direct Consolidation Loan” is a federal loan that allows you to combine all your eligible federal student loans into one new loan. You can use a Direct Consolidation Loan to consolidate any federal education loans that are eligible for consolidation. You won’t save money on interest if you use this option, but you will make only one monthly payment with one interest rate instead of several.
The difference between refinancing student loans, student loan consolidation, and federal student loans consolidation
Student loan refinance:
- Can add federal student loans and private student loans to a private student loan refinance
- Can refinance a single student loan to get a lower interest rate and more favorable terms
- Student loans refinance interest rates based on borrower qualifications
- Must qualify with satisfactory credit and income
- The lender sets qualification criteria
- Refinancing federal student loans with a private lender means you’ll lose eligibility for Public Service Loan Forgiveness, Teacher Loan Forgiveness, Income-Driven Repayment (IDP), forbearance, and deferment
Private student loan consolidation:
- Can add federal student loans and private student loans to a private student loan consolidation
- The process combines multiple loans into one loan with one monthly payment
- Interest rates are based on borrower creditworthiness and ability to repay the loan
- Must qualify; can be turned down for a private loan
- Qualification criteria set by individual lenders
- Consolidating federal student loans with a private lender means you’ll lose eligibility for Public Service Loan Forgiveness, Teacher Loan Forgiveness, Income-Driven Repayment (IDP), forbearance, and deferment
Federal student “Direct Loan Consolidation”:
- Federal student loans only; cannot add private student loans
- A Direct Consolidation Loan will not cover any private education loans or Parent PLUS loans.
- Must have at least two eligible federal student loans to be eligible for federal student loan consolidation
- Student loan consolidation rates are a weighted average of the rates across all your loans, rounded up 1/8% of 1%
- No need to qualify with a credit check
- Qualification criteria are set by the federal government and are the same for every student loan borrower.
- Maintain eligibility for Public Service Loan Forgiveness, Teacher Loan Forgiveness, Income-Driven Repayment (IDP), forbearance, or deferment offered with federal student loans
- Visit StudentLoans.gov for more information about how to consolidate federal student loans.
To sum it up
Student loan refinancing, consolidation, and the federal Direct Consolidation Loan all require you to leave your old student loans behind and get a new one instead. Both first options are available for either private or federal loans and are taken with a private lender. The federal Direct Loan Consolidation is only available for eligible existing federal student loans and is offered by the government. It is important to notice the differences, benefits, and downfalls of each before you take action.