Student Loan Consolidation vs. Refinancing: What is the Difference?

Michael Lux Blog, Student Loans 0 Comments

The terms student loan consolidation and student loan refinancing are often used interchangeably.  Often, consolidation and refinancing mean exactly the same thing.  However, there are times when consolidation is different from a refinance. Understanding these differences can help avoid a miscommunication with your student loan lender or servicer.

When Refinancing and Consolidation mean the same thing…

When you refinance a loan, it typically means that you are taking your business from an old lender to a new lender.  As part of the refinance process, your new lender pays off your old loan entirely.  In return, you agree to pay off a new loan with the new lender.  Borrowers typically go this route to secure a lower interest rate.  For example, Sally may owe Navient $15,000 on a student loan with an 8% interest rate.  If she refinances it with SoFi, it would create a new loan with a balance of $15,000 at a lower interest rate.

Consolidation is often used to describe exactly the same process.  This is especially true when borrowers have multiple loans.  If Sally has loans, A, B, and C with three different companies, she may consolidate them into a single loan with a new lender.  She still owes the same amount of money, but has a new lender with new terms.  Here again, the purpose is lower interest rates.

At times lenders will refer to a refinance as paying off one old loan with one new loan, and a consolidation as paying off multiple old loans with one big new loan.  This difference in terminology does not really matter.  The process is the same regardless.  The new lender pays off the old debt, and the borrower gets new, hopefully better, terms.

When Consolidation is different from Refinancing…

There is one circumstance when student loan consolidation is much different than a refinance.  This occurs when you consolidate your federal student loans with the federal government.

This financial maneuver can be done for a number of reasons, but it does not lower your interest rate.  Hence the fact that it is not considered to be refinanced.

When you consolidate your federal loans with the federal government great care is taken to ensure that your interest rate changes as little as possible.  This is accomplished by calculating the weighted average of the interest rates across all of your student loans.  Bottom line: consolidating your loans with the federal government does not get you lower interest rates.

The Key Difference

Understanding the difference between student loan refinancing and student loan consolidation comes down mainly to wrapping your mind around to slightly different definitions.  In the case of refinancing vs. consolation, the difference really doesn’t matter.  The terminology difference that really matters is understanding the differences federal student loan consolidation and private student loan consolidation.  These two processes sound similar, but they are very distinct.  Before you consolidate or refinance, the important terminology to have down is private vs federal consolidation.