If you’re saddled with student loan debt and worried about making payments on your federal loans during the coronavirus pandemic, you can breathe a sigh of relief. A coronavirus aid bill passed in March pauses payments on federal loans and sets interest rates at 0% from March 13 through Sept. 30, 2020. Private lenders may offer their own special relief programs, or you can refinance your private student loans to save money.

Whether you have federal, private or both types of student loans, consolidating or refinancing them might help you reduce your debt, better manage payments and work toward other financial goals. Too much student loan debt can affect your ability to save for retirement, increase disposable income or qualify for other loans, such as a mortgage. This guide explains the differences between refinancing private student loans and consolidating federal student loans, the pros and cons of each, and the best options for different situations.

Methodology: National student loan refinance companies in this guide are selected based on consumer ratings and availability of products.

No private student loan refinancer is perfect for every borrower. These lenders are a good starting point for most people, but you should research each company on your own.

Whether you consolidate or refinance student loans, you combine multiple loans into one. The lender will pay off your loans and issue you a new loan for the total amount you owe.

You can consolidate federal student loans through the U.S. Department of Education. The consolidation will give you one loan payment with a new loan term and fixed interest rate that is the weighted average of your previous rates.

A private lender will allow you to refinance your private student loans, ideally at a lower rate. The new loan terms will be based on your creditworthiness.

You can refinance federal student loans only through private lenders, but combining them with private student loans is not always a good idea. That’s because you’ll lose access to federal income-based repayment plans and loan forgiveness programs.

Student loans can come from either the federal government through the Department of Education or a private lender, such as a bank or credit union, a state agency, or an educational institution.

Your options for consolidating and refinancing, and the pros and cons of doing so, may vary depending on whether you have federal student loans, private student loans or both.

Consolidating Federal Student Loans

The federal government’s direct loan consolidation program is free. When you consolidate your federal loans, the Department of Education issues a direct consolidation loan with a fixed interest rate.

The new rate is the weighted average of the interest rates on the loans you’re consolidating, rounded up to the nearest eighth of a percent. That means your new rate will fall between what was your highest rate and your lowest rate.

Because federal stude
nt loan consolidation doesn’t lower your interest rate, you may not save on interest, but it can make managing your loans easier with a single monthly payment.

Consolidating your federal student loans requires no credit check and could offer you access to more repayment plans or forgiveness programs.

Rather than consolidate your loans, you could consider changing repayment plans to extend your loan terms and lower your monthly payments. But this also won’t reduce the cost of borrowing.

Refinancing Private Student Loans

When you refinance private student loans, a private lender repays your loans – private, federal or both – and issues a new loan based on your creditworthiness. If you can qualify for a better interest rate, you could save money and lower your monthly payment by refinancing your private student loans.

Refinancing terms for your new private student loan are based on many factors, including your income, debt, employment and credit. In contrast, consolidating your federal loans neither changes the interest that accrues on them nor your eligibility for federal student loans.

Rest assured, you don’t have to choose between refinancing or consolidating your student loans if you have both federal and private loans. An all-or-nothing approach may not work for you.

You could consolidate your federal student loans and refinance your private loans, or you might opt to consolidate some of your federal loans and refinance others. Or you may research your options and decide not to do either.

Many borrowers don’t regret their student loans and haven’t explored refinancing them for savings, according to a U.S. News survey of consumers with federal or private student loans. They revealed how much they borrowed, whether their payments are affordable and other details about how their student loans have affected their lives.

Among the survey’s key findings:

Most student loan borrowers surveyed took out less than $50,000 in loans.

Nearly three-quarters, or about 72%, of survey respondents said they took out $49,999 or less in student loans, and 28% borrowed between $10,000 and $24,999. But about 10% faced six-figure student debt of $100,000 or more.

A little more than half of survey respondents said their monthly student loan payments are affordable.

But about a quarter of student loan borrowers said their student loan payments aren’t affordable. And about 11% have student loans in deferment or forbearance.

Student loan debt can get in the way of personal goals.

Close to half of survey respondents said both saving for retirement and increasing disposable income have been affected by student loan debt. They also said saving for a down payment on a home, planning a wedding, starting a family, qualifying for better credit products and having more career choices were hurt by student debt.

Only about half of student loan borrowers have used hardship options, such as deferment or forbearance.

Student loan hardship options can pause payments when borrowers are in a financial bind, but not everyone is using them. About a third of survey respondents said they’ve used deferment, and less than a quarter have used forbearance. About 17% have taken advantage of the chance to reduce their monthly payments, and about 12% used a grace period extension.

Most student loan borrowers aren’t consolidating or refinancing student loan debt.

About 67% of survey respondents said they haven’t consolidated or refinanced student loans. Federal student loan consolidation is the most popular option among those who have, with 22% of survey respondents choosing it. Nearly 8% refinanced both private and federal loans, and almost 4% refinanced private student loans.

More than half of student loan borrowers didn’t research lenders.

When asked how much time they spent researching student loan lenders, about 56% of those surveyed said they didn’t research any lenders. But about 20% spent up to two hours on student loan research, and 10% spent more than six hours.

Student loan borrowers tried financial aid alternatives before taking out private student loans.

Scholarships are the top alternative to private student loans, followed by jobs in college, student grants and work-study programs, respectively.

Survey respondents are somewhat split on whether they regret taking out student loans.

A little more than half of respondents said they didn’t regret their student loans because they could get jobs in their fields, attend good schools or build credit. But 41% had regrets: that they’re still paying off their student loans, that loans kept them from pursuing other goals or that they couldn’t land a job in their field.

Student loan borrowers said interest rate was the most important factor when choosing a loan.

Asked which factor was the most important when choosing a student loan, 45% of survey respondents said they prioritized getting a low interest rate. Minimum or maximum loan amount was crucial for 32%, and 30% said repayment or hardship options were key.

Before you proceed with consolidating or refinancing, check that your loans are eligible and make sure your choice is the right fit.

Federal Student Loan Consolidation Eligibility

Private Student Loan Refinance Eligibility

Eligibility can vary by lender, but many private student loan refinancing companies look at these factors:

Most lenders don’t disclose their maximum DTI ratio for applicants, but among those who do, it’s often between 40% and 50%. You can reduce your DTI ratio by switching to longer repayment plans, such as income-driven repayment for federal loans, Kantrowitz says.
Also, lenders may require you to meet other conditions for refinancing private student loans. If you can’t qualify on your own, some lenders might approve you with a creditworthy co-signer.

Lenders could restrict refinancing to those who:

Use this chart for a side-by-side comparison of consolidating federal student loans with refinancing private student loans.

Congratulations! You just graduated and were hired for your first job earning $65,000 a year in San Francisco.

You have three federal direct subsidized loans: one for $10,000, one for $6,000 and the other for $5,000. Once you begin to pay down your student loans under the standard repayment plan, you will spend 10 years and $27,409, including interest, to wipe out your debt.

Consolidating vs. Refinancing

Here’s how this scenario could change by either consolidating your federal loans or refinancing them with a private lender.

Be sure to compare the monthly payment with the total payment when you are considering consolidating or refinancing student loans, Kantrowitz says. Your monthly payment could be lower – sometimes much lower – but you will pay thousands of dollars more in interest.

Of course, you’ll want to compare more than just your monthly payment and interest rate to determine whether consolidating or refinancing your student loans might make sense.

Borrowers in certain circumstances may be better off consolidating their loans with the federal program than refinancing. Consolidation does nothing for your interest rate, but it does make your loans easier to manage, says Travis Hornsby, founder of Student Loan Planner, a consulting firm that helps borrowers manage student loans.

Consolidation could make sense if:

On the other hand, choose refinancing “if you’re trying to reduce your interest rate and you need to pay off your balance in full,” Hornsby says. Refinancing your student loans with a private lender could be a good idea, as long as:

When comparing private student loan refinancing companies, you can select the right one for your needs by reviewing eligibility requirements and these key factors:

Loan and Refinancing Terms

Repayment and Hardship Options

Overall, interest rate and ease of refinancing are the most important considerations when refinancing, Hornsby says, and that can guide your decision-making. Also, take a look at how generous the forbearance terms are and which servicer the company uses.

“That said, student loan refinancing is really a commodity,” Hornsby says. “You’re looking for the lowest interest rate with the least amount of pain in the application process. Luckily, that process is generally pretty fast and easy.”