Student Loan Consolidation vs. Student Loan Refinancing

Understanding your options for consolidating or refinancing your student loans may help you manage that debt more wisely.

If managing your student loan payments feels overwhelming, you’re not alone. Many people face the same challenge, but there are options that can help. Consolidation or refinancing could provide the relief you need to handle your debt more effectively. While these terms are sometimes used interchangeably, it's important to understand that they are not the same and serve different purposes.

Let’s begin by looking at the difference between consolidation and refinancing. 

In short, student loan consolidation combines multiple federal loans into a single federal loan, while student loan refinancing entails opening a new loan to pay off one or more student loans, which could include both federal and private student loans. Both offer the opportunity to combine your debt into a single monthly payment, but each option also comes with potential pros and cons.

Student Loan Consolidation

If you have taken out more than one federal student loan, you may be spending more time than you’d like juggling various due dates, terms, and interest rates. If so, the convenience of a consolidation loan may prove a good option for you. A Direct Consolidation Loan, made through the U.S. Department of Education, pulls multiple federal student loans together into one loan. The interest rate on this loan is based on the weighted average of the various loans it brings together. Because this rate is fixed, it will not change over the term of the loan. 

PROS:

• Simplifies repayment of federal (not private) student loans by consolidating multiple loans into one monthly payment.
• Provides ongoing access to the federal loan protections, repayment options, and forgiveness programs associated with these loans. For example, some borrowers may choose an income-based repayment plan, and borrowers who work in public service may be eligible to have their federal loans forgiven after 10 years of repayment.
• May lower your monthly payment (with a term extension). 

CONS:

• Does not give you the opportunity to pay a lower interest rate.
• If a loan consolidation entails a term extension, it may cost you more over the life of the loan.
• You can apply for or learn more about federal loan consolidation at studentaid.gov.

Student Loan Refinancing

If you would like to manage fewer loans, but you have private student loans or a mix of private and federal student loans, refinancing may enable you to combine multiple loans into a single loan with one monthly payment. You may also choose to either shorten or extend your term when you refinance, depending on your financial goals:

• If your goal is to pay your debt off sooner and reduce the amount of total interest you pay, you may opt for a shorter term with a higher monthly payment.
• If your goal is to reduce your monthly payment, then you may decide to extend your term over a longer time period. Keep in mind, however, that extending the term will raise the overall cost of the loan, since it will incur more interest.

Refinancing differs from consolidation in that it requires you to apply and qualify for a new loan to pay off your existing loans. Lenders consider your credit history, income, debt-to-income ratio and other factors in determining your eligibility and interest rate. Depending on your priorities, consider whether a lender offers a lower annual percentage rate (APR), a shorter term, and/or lower monthly payments than your existing loans.

PROS:

• Enables you to shop for a lower APR to save money over the life of the loan. You may also be offered the choice of a fixed or variable interest rate. 
• Offers you the flexibility of choosing a shorter term to help you pay your debt off more quickly, or a longer term to lower your monthly payment.
• May allow you to combine multiple federal and/or private loans into a single loan with a single monthly payment.

CONS:

• Eliminates access to federal loan protections, repayment options and forgiveness programs.
• May cost you more over the life of the loan (with a term extension).

Student Loan Consolidation vs. Student Loan Refinancing

The chart below provides a summary of the key differences between consolidating and refinancing your student loans.^[1]

	Student Loan Consolidation	Student Loan Refinancing
Purpose	Merges multiple federal loans into a single federal loan.	Merges private and/or federal loans into one new private loan.
Eligible Loans	Federal loans only.	Both private and federal loans.
Interest Rate Reduction	No, the rate is based on a weighted average of the combined loans.	Yes, lower rates potentially available.
Potential Savings	No. While monthly payments may be lower by extending the term, total interest paid increases.	Yes, refinancing can reduce overall loan costs.
Federal Loan Benefits	Yes. Retains access to federal protections, repayment plans, and forgiveness programs.	No. Loses federal loan protections, repayment options, and forgiveness programs.
Payment Structure	Single monthly payment.	Single monthly payment.

Tax Consequences of Refinancing Student Loans

Many individuals take advantage of the student loan interest deduction, which allows you to deduct a portion of the interest you pay on your student loans each year.^[2] This reduces your taxable income if you meet certain income requirements.

However, if you refinance your student loans into a private loan, the new loan is no longer considered a qualified student loan. As a result, you will lose the ability to claim the student loan interest deduction on your taxes. 

Before deciding to refinance, weigh the potential savings against the cost of losing this deduction. Consult with a tax advisor to fully understand the potential impact of refinancing your student loans.

Explore Your Student Loan Options

The more you know about your financial options, the better you can manage your debt. Research your options and consider the option that best meets your needs.

When considering refinancing your student loans, utilize the PNC Bank Student Loan Refinance Calculator and learn more about how the PNC Bank Education Refinance Loan may help you save money or time as you work toward paying off those student loans.