Refinancing vs. consolidating student loans: the quick and easy guide

By Corey Buhay | Published on October 21, 2025

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Juggling multiple student loans from different lenders and loan servicers can be complicated to manage — especially if each one has a different payment deadline, interest rate, and loan term. But there are ways to make the process a bit easier, and potentially even save you money over time.

If you’ve been looking into student loan consolidation vs. refinancing, here’s everything you need to know to make the right decision.

Student loan refinancing vs consolidation: What’s the difference?

When you’re looking for ways to simplify your student loan repayment process, you’ll come across two main options: refinancing and consolidation. While there are some similarities between the two, they’re not interchangeable.

What is student loan consolidation?

Student loan consolidation is a way to reorganize your federal student loans. Essentially, you exchange all your current loans for a single new loan from the federal government. This new loan is called a Federal Direct Consolidation Loan, and it comes from the U.S. Department of Education. When you consolidate, you have the option to bundle all your eligible federal loans into one simple monthly payment with a repayment term of up to 30 years. You can consolidate most federal loans, including PLUS loans and loans from the Federal Family Education Loan (FFEL) program. However, you cannot consolidate private student loans.

If you decide to consolidate, your new interest rate will be calculated based on a weighted average of the current interest rates of your existing loans, rounded up to the nearest eighth of a percent. So, you’ll likely end up paying the same overall amount in interest or a slightly higher amount after consolidating. You cannot, however, reduce your rate through federal consolidation. (Wondering what these numbers might look like for you if you refinanced? You can calculate your new, post-consolidation interest rate using our consolidation calculator.)

Normally, you only pay interest on the remaining principal of your loan, which is the amount you’ve borrowed minus the payments you’ve made thus far. However, it’s important to note that any outstanding interest on your loans will be capitalized, or added to the principal, when you consolidate. That means you’ll start accruing interest on that larger amount after consolidating. So, if you have a bunch of outstanding interest on your federal loans, it’s usually best to pay that off before you move forward with a federal consolidation.

What is student loan refinancing?

Student loan refinancing is when you take out a new loan from a private lender to pay off your existing loans. You then pay the new lender back under new terms. Refinancing is available from non-government financial institutions, like banks, credit unions, and online lenders.

After refinancing your loans, you’ll end up with one single monthly payment, instead of having to pay your loans individually as you may have previously done if you had multiple lenders.

When you refinance, you may have the opportunity to qualify for a lower interest rate based on your creditworthiness. While most students and recent graduates don’t have an easy time qualifying for loans on their own, many lenders offer borrowers the chance to refinance with a cosigner. A cosigner can help you gain access to lower interest rates than you’d qualify for you on your own.

So, what’s right for you — consolidation or refinancing? Here are some advantages of both options to consider before you choose.

The advantages of refinancing student loans

Refinancing is a unique financial tool with serious benefits for certain borrowers. Here are a few of the big ones.

You can lower your interest rate

When you refinance your loans through a private lender, you have the opportunity to get a lower interest rate. Refinancing is the only way to get a lower rate; federal student loan consolidation doesn’t give you this opportunity. Regardless of your credit score or how interest rates may have risen or fallen since you first took out the loans, your post-consolidation interest rate will always be an average of the rates of your current loans.

If you have a high enough credit score, you may be able to get a significantly lower rate by refinancing through a private lender. Refinancing can be especially handy if you have higher-interest federal loans, like Parent PLUS Loans, and you’re willing to sacrifice some federal protections in exchange for a lower rate.

One of the best ways to qualify for the lowest interest rate possible is to go into your application with a high credit score. While other factors will also influence your rate, such as your debt-to-income ratio and job stability, the higher your credit score is, the lower your interest rate is likely to be.

It can reduce your monthly payment

Another benefit of refinancing is the potential to significantly lower your monthly payments. This is a good option if you are currently struggling to cover your monthly payment or essential household bills. Some people also choose this option because they would like to have more room in their budget for other expenses.

The only catch is that refinancing for a lower monthly payment often results in a longer loan term. This means that you’ll be paying for the loan for a longer period of time, and potentially pay more in total interest over the life of the loan.

However, some lucky borrowers qualify for both a lower interest rate and a lower monthly payment. This is the ideal outcome for student loan refinancing which allows you to put more money towards your principal and lower your monthly student loan bill.

You can shorten your repayment term

Refinancing gives you an opportunity to shorten your repayment term to better suit your financial needs.

For example, if you’re earning more now than you were when you first started paying back your loans, you may want to choose a shorter repayment period so you can pay your loans off faster. That could save you significant money in interest and help you get out of debt sooner.

Earnest lets borrowers choose their loan term on a sliding scale so you can choose the repayment plan that works best for you and your financial situation.

You’ll get to choose between variable and fixed rates

When you refinance, you’ll be able to switch your loans from a fixed to a variable interest rate, or vice versa. Loans with variable rates generally charge less interest at the outset of the loan, but that rate may increase or decrease over time. That makes variable rates a slightly riskier choice, but it may be more cost effective for shorter-term loans. Fixed-rate loans, on the other hand, stay exactly the same throughout the loan period no matter how market interest rates fluctuate. That can make them a more cost-effective choice for loans with long terms.

When you refinance your loans, you get the opportunity to choose whether you’d like a fixed or variable rate — and if you refinance through Earnest, you can change your mind later on. Borrowers in good standing can apply to refinance their debt through Earnest to change from a fixed Annual Percentage Rate (APR) to a variable APR loan — or vice versa — once every four months as long as you have made consecutive on-time payments. Just be aware that the process requires a hard credit check.

You can combine all types of loans

Consolidation only allows you to bundle your federal loans together, while refinancing allows you to bundle all federal and private loans into one payment. So, if you’re looking for one single payment and you have both federal and private debt, the only way to bundle all your loans together is through refinancing. There is no private consolidation option.

It’s a path to cosigner release

Refinancing your loans also gives you a chance to release a cosigner from your private student loan debt. If your parents cosigned your loans, for example, and they no longer want responsibility for your debt in the event you can’t pay, you can refinance without a cosigner to release them from that risk.

You get to choose your partner in lending

When you consolidate your loans through the federal government, you have the option to choose a new loan servicer, but it has to be a servicer on the federal government’s very limited list of options. Through refinancing, however, you can shop from a wide range of private lenders to find one that’s the right fit for you. Each loan servicer offers different advantages and perks and may have different approaches to assessing potential borrowers to help you get better rates if your credit score isn’t very high.

Earnest, for example, never charges origination fees, late fees, prepayment penalties, or fees of any kind. Earnest also lets borrowers in good standing request to skip a payment once a year if they need a short break from payments.

The advantages of student loan consolidation

Federal consolidation also has some major benefits. Here are a few of the ways it can benefit federal borrowers.

Student loan forgiveness remains an option

While you can’t lower your interest rates with a Direct Consolidation Loan, there are some perks to keeping your student debt with the federal government. For starters, anyone with eligibility for student loan forgiveness, including the Public Service Loan Forgiveness program (PSLF), will still be eligible for those programs after consolidating. If you refinance your federal loans, however, they become private loans. That means they’re no longer eligible for forgiveness or any other federal program.

You’ll maintain access to federal borrower protections

Consolidating your loans keeps them under the purview of the federal government, which means they’re still eligible for income-driven repayment plans. These plans help you access monthly payments that are easier to afford. You’ll also reap the benefits of any positive changes to federal loan policies, such as when the government temporarily suspended all student loan payments to relieve borrowers during the COVID-19 pandemic.

Additionally, if for some reason you become unable to pay your federal loans, you’ll be able to ask for federal deferment or forbearance. These are periods where you’re granted a temporary hiatus from payments to help you get back on your feet.

It doesn’t matter if you have good credit

Virtually everyone with federal loans is eligible for consolidation regardless of your credit score — there’s no credit check required to consolidate your loans. Even if you have bad credit or no credit, and even if you’ve never had a credit card, you can apply to consolidate your loans. Your interest rate is determined by a weighted average of the interest rates of the loans you’re consolidating — not your credit.

You can get a lower monthly payment

When you consolidate your loans, you’ll get to choose a new loan term, which means your payments will likely be lower than they were at the outset of your loan. A longer loan term also means you’ll accrue more interest and pay more over time, but lower payments may be easier for you to make. This option may be worth it to you in the long term if you’re struggling to meet your minimum due every month.

It unlocks new repayment and forgiveness plans

Federal Family Education Loans and Perkins Loans aren’t eligible for student loan forgiveness programs on their own. However, if you consolidate those loans with other federal debt, all of it together will be eligible for any forgiveness programs you might qualify for.

What student loan consolidation and refinancing both offer

Regardless of whether you consolidate or refinance your loans, there are some benefits you’ll get from both — mainly, ease and simplicity.

One easy payment

All forms of debt consolidation serve to simplify your payments. So, if you bundle your federal loans into a Direct Consolidation Loan, you’ll have one simple student loan payment regardless of how many loans you previously had and how many loan servicers managed them. (Remember, though, that only your federal loans can be consolidated. If you have private student loans in addition to federal loans, you’ll still have to pay the private ones separately.)

Similarly, if you refinance all of your public and private student loan debt through a private lender, you’ll end up with one single monthly payment at the same interest rate. No more trying to keep track of which loan accrues interest faster or strategizing how to pay down the principal — just set up autopay and you’re good to go.

Auto Pay discount

All federal loans give you an interest rate reduction of 0.25% for setting up automatic payments that come straight out of your checking account every month. Most private lenders do as well, including Earnest. As long as you’re enrolled in autopay, you’ll get a 0.25% rate reduction on top of whatever rate you’ve qualified for.

Should I refinance or consolidate my student loans?

Both refinancing and consolidation have distinct benefits and disadvantages. No matter which you choose, it’s important to know that you won’t be able to un-refinance (except for during the three-day “cooling off” period), and you can’t un-consolidate your student debt or send your loans back to their original servicers.

Here’s a breakdown that may help you decide between the two.

Student loan refinancing may be ideal for you if…

• You can get a lower interest rate with a refinance
• You can benefit from a lower monthly payment and understand that it could result in a longer loan term (and more interest payments)
• You want to switch to a shorter loan term to get out of debt faster
• You want to combine loans from both federal and private lenders
• You don’t expect to need protections offered by the federal government, such as income-based repayment plans or student loan forgiveness
• You want more control over who’s managing your loans

Federal loan consolidation may be ideal for you if…

• You’re eligible for student loan forgiveness, or think you might be someday
• You can’t get a lower interest rate by refinancing
• You expect to want to use the federal government’s income-based repayment options
• You don’t want to give up the protections the federal government offers to borrowers
• You only have federal education loans and you want to keep them federal

Learn more about refinancing with Earnest

Federal student loan consolidation can help simplify the student loan repayment process by bundling all your federal loans into one simple payment. But it’s not the whole picture — even if you only have federal loans, student loan refinancing may help you save money and pay off your full loan amount faster.

It takes about three minutes to check your interest rate with Earnest and see how much a student loan refinance could save you — and it won’t hurt your credit score. Try out our student loan refinance calculator today to see how refinancing could help you meet your personal finance goals.

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About the Author

Corey Buhay

Corey Buhay is a writer and editor based in Boulder, Colorado. She’s passionate about literature, the outdoors, and doing her taxes by hand. She has been writing about student loans and personal finance for Earnest since 2019. You’ll find her work in Outside Magazine, Backpacker Magazine, Smithsonian, and The Denver Post.

Disclaimer

Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.