Student Loan Refinancing and Consolidation Terms You Need to Know

By Trish Sammer Updated on May 3, 2019

If you have more than one student loan, you may have considered consolidating them to simplify your monthly payments.

But what does consolidation mean, exactly? Is it the same as refinancing? The fast answer: Student loan consolidation allows you to take multiple monthly student loan payments and join them together. Student loan refinancing is when you take out an entirely new loan to pay off your existing student loans.


If you’d don’t know the answers to these questions, you’re not alone. The terminology that accompanies student loans can run the gamut from confusing to downright intimidating.

But listen, there’s no need to let a few vocabulary words come between you and your opportunity to more easily manage your student loan payments. Let’s ditch  the “bank speak” and talk like real humans about what some of these words mean—and how they can impact your finances.

Consolidation v. refinancing

So what’s the difference between student loan consolidation and student loan refinancing?

While both may allow you to stop making multiple payments to different lenders every month, consolidation and refinancing work in very different ways.

Let's dig in a little deeper to the concepts we discuss above. 

Student loan consolidation allows you to take multiple monthly student loan payments and join them together, so you only have to make one monthly payment.

But there’s more. Your monthly payments can potentially go down with a consolidation, since you may be allowed to pay off your balance over a longer period of time.

However, your interest may go up just slightly, because your combined interest rate average may be rounded up. If you consolidate with a Direct Consolidation Loan through the federal government, your new interest rate will be determined by the weighted average of all your loans, rounded up to the nearest 1/8 percent. 

Student loan refinancing is when you take out an entirely new loan to pay off your existing student loans.

If your credit score has improved since you originally took out your student loans, you may qualify for a better interest rate and/or other attractive loan terms, such as lower monthly payments.

You may also be able to extend your loan repayment period during refinancing, which can further reduce the amount of your monthly payment.

Other terms you should know

If you have federal student loans, you can consolidate with a Direct Consolidation Loan, which is a loan issued by the federal government. Note: applying for a Direct Consolidation Loan is free, so steer clear of any companies that attempt to charge you a fee for this service.

Deferment is a temporary period in which you’re not required to pay your student loan. For example, you may have defer student loan payments on your federal loans if you go back to school. 

Forbearance is often confused with deferment, but it’s a different beast. Forbearance is when your lender temporarily permits you to stop making payments on your loans if you’re experiencing a financial hardship. However, interest will continue to accrue during the non-payment period, which can balloon the size of your loan. That’s why it’s often better to seek out refinance or consolidation options first, before requesting a forbearance.

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Loan forgiveness programs allow you to gain credits toward having some of your federal loan debt forgiven. If you consolidate your federal loans, you will forfeit any credits you've already earned, so be sure to carefully weigh the pros and cons first. (Pro tip: Call your lender to find out how many qualifying payments you've already made.)

Cosigner release allows you to excuse your cosigner from a loan. If you’ve been making on-time payments and your credit history meets certain requirements, you may be able to assume full responsibility for your student loan. You may apply for refinancing with or without a cosigner, depending on your credit score and the lender.

Debt-to-Income ratio is a calculation that lenders will look at to determine your eligibility for student loan refinancing. This ratio compares your total monthly income to your total monthly debt obligation. Having a favorable ratio can help qualify you for a lower interest rate. 

Remember, given a choice between consolidation and refinancing, refinancing is the choice that’s more likely to  lower your interest rate. However, refinancing may not be the right option if you have federal student loans, so make sure to carefully consider what's right for you. 

To find out much you could save by refinancing, see our Student Loan Refinancing Calculator 

Published in: Refinance, Consolidate

About the Author
Trish Sammer

Trish Sammer is Nitro's managing editor. Her work has appeared in Woman’s Day, Redbook, Huffington Post, TechCrunch, and Forbes. She has also written for various corporate clients, including the tech giant SAP, The Franklin Institute, and PSE&G. When Trish isn’t busy acting as a writing ninja for other people, you can find her … well, writing about other stuff, like divorce and blended family life. She lives outside of Philadelphia with her husband, their combined brood, and the world’s laziest dog. Read more by Trish Sammer