Pros and Cons of Refinancing or Consolidating Your Federal Student Loans Pros and Cons of Refinancing or Consolidating Your Federal Student Loans
According to Edvisors, on average the student loan burden for a student in the 2015 undergraduate class was $35,000. It is believed that this... Pros and Cons of Refinancing or Consolidating Your Federal Student Loans

According to Edvisors, on average the student loan burden for a student in the 2015 undergraduate class was $35,000. It is believed that this amount is the combination of several loans, because each semester or year students usually take out a new student loan. When you start to repay your loans, it might be a pain to track multiple lenders and the payments you make every month, but if you consolidate or refinance your loans into one new loan, it can simplify everything.

You might be able to consolidate your federal student loans, which will entail the combination of all or the majority of your federal loans into a new single Federal Direct Consolidation Loan. This means you will have a single payment each month and you will have only one interest rate, whatever the current rate is.

Refinancing works similarly to consolidation, except it is private lenders rather than the federal government who offer to refinance your federal or private loans into one loan. An application to refinance is much like applying for a new loan at the current interest rate, and your current financial profile and credit score will determine the interest rate you pay.

The consolidation can get rid of the headache of managing a number of student loans, and it could even save you money depending on the interest rates. Of course, there are pros and cons to refinancing or consolidating your loans. Let’s have a look at them.

Consolidating federal student loans

You can apply to consolidate your federal student loans at


  • You will not have to pay any fees when you consolidate federal loans with a Federal Direct Consolidation Loan.
  • There is no credit check, and your personal finances are not considered. You are eligible if you have a minimum of one Direct Loan or Federal Family Education Loan in repayment or in a grace period.
  • Locking in a fixed interest rate helps you plan for your future, so if the current rates are low, that is your savings, and you have that rate until the loan’s end. Of course, the flipside of that is that when the interest rates are high, you are going to be stuck with them as well.
  • When you consolidate your loans, you may be able to lower your monthly payments. However, this usually lengthens the payment period, which means overall you could pay more.
  • Federal student loans which did not originally qualify for special programs like Public Service Loan Forgiveness or the Income-Contingent Repayment Plan, could now be eligible for the programs after they are consolidated into a Direct Loan.
  • The consolidated loan is considered a new loan, the 3-year limit for forbearance or deferment may be reset. Forbearance and deferment let the borrowers suspend or reduce their payments in special circumstances like qualifying for active military service, unemployment, or participating in an approved graduate fellowship program.
  • Student loan experts say that you can resolve your delinquent student loan (1-270 days past due date) by consolidating it. The loan provider generally reports federal student loan late payments to the credit bureaus after 90 days, which can cause your credit score to take a negative hit. Once the Direct Consolidation Loan is issued, it begins as current even if a number of delinquent loans make up the consolidated loan.
  • Also, you can possibly consolidate a defaulted student loan at least 271 days past due. The U.S. Department of Education might require you to make repayment arrangements that are satisfactory on the defaulted loans with the current loan holder, or you may have to agree to repay the new loan with one of the income-based payment plans before you can consolidate a default loan.
  • If you do not like your loan provider, you can pick a new provider at the time of consolidating. However, keep in mind that in the future the provider you choose could sell your loan to another lender.


  • Your consolidated loan payment will begin approximately two months after the Direct Consolidated Loan is disbursed, even if there was a grace period for the consolidated loans.
  • You cannot consolidate private student loans with the Federal Direct Consolidation Loan program.
  • When you lower your monthly payments by extending the payment period, it also means that you could pay more interest on the loan.
  • The interest rate on the new loan will be the weighted average interest rate of the consolidated loans that is rounded up to the nearest eighth of a percent. This means that you will pay slightly more in interest. If you have a high dollar value in student loans, this can really add up.

Refinancing federal student loans

When you refinance, you combine your student loans into a single loan. However, it is private lenders, not the federal government that refinance your student loans, and the interest rate will depend on what the current market rate is in combination with your credit profile. You also might get different terms with various lenders, so you should shop around first.


  • The interest rate of your new loan will depend on the current interest rates and your credit profile. If the market rates are down or your credit is better than when you first got your student loans, you could possibly save money on interest payments over the loan’s life.
  • Some lenders will permit you to refinance both your private and federal loans into one new loan.
  • If you are able to get a lower weighted average interest rate and keep the same repayment period, then your monthly payments should go down.


  • Lenders may also consider your employment status and educational background.
  • Your new loan may not be treated as a student loan, which could stop you from being able to take the student loan interest tax deduction. If your loan is not considered to be a student loan, there may also be a prepayment penalty, which means you might be charged a fee if you pay off the loan prior to the due date. Before you refinance, make sure you check to see whether the new loan will be treated as a student loan.
  • When you refinance, it will usually require a credit check along with a low debt-to-income ratio. To calculate this just add your monthly debt payments and divide by your gross monthly income. Most lenders will want a debt-to-income ratio of 20% or less, but a few will take 30%.
  • Usually the payment term for refinanced loans is shorter than that of federally consolidated loans. Even if the interest rate is decreased, your monthly payment could be the same, because the repayment period becomes shorter. In other cases, your monthly payment might be higher.
  • Some lending providers charge a fee to refinance, like an origination fee that is equal to a percentage of the new loan.
  • You will not be eligible for federal programs like Public Service Loan Forgiveness or Income-Based Repayment.
  • You could lose special discounts/rebates that were associated with your previous loans.


There are all kinds of pros and cons that you need to consider when you are trying to decide to consolidate or refinance your student loans. You will simplify the repayment process when you combine several loans into one loan. In some cases, you could even save money or lower your monthly payment. However, there is also the possibility that you could end up paying more in interest, or you could void your eligibility for any flexible repayment programs.

[Featured image credit: Ann- Kathrin Rehse via / Image cropped, color filters added]

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