If you’re one of 43 million Americans saddled with student debt, repaying those loans can be daunting. Like many grads with a mix of federal and private loans, as you write (virtual) checks each month, it may feel like you’re barely making a dent. To simplify your loans and possibly secure better terms, you may be able to reorganize your student loans into a single loan. Before you rush to the bank, hold up. Pretend like you’re back in class and take notes.  

What is student loan consolidation and refinancing?

One-third of adults 18 to 29 have student loan debt, and about one-third of all Americans with student loans owes about $30,000, according to U.S. News. That’s a lot of Benjamins.

When you take out school loans, you can borrow from the federal government, private lenders, or both. One student could have two, three, or more loans, all with different terms, conditions, payment dates, and amounts. It’s overwhelming.

When you consolidate or refinance, you replace your old loans with one new loan with fresh terms and a new—hopefully lower—interest rate. That can help you better manage your finances or even pay off your student loans early. However, there are a lot of conditions and rules, so read on.

What’s the difference between consolidating and refinancing student loans? 

First things first: When we talk about reorganizing student debt, the most important thing to know is only federal student loans can be consolidated through the federal government. 

Here are a few key considerations:

Consolidation is only for federal loans 

When you consolidate federal student loans, you take multiple loans and roll them into a new type of consolidated loan, such as a Federal Direct Consolidation Loan. The new loan will have a fixed interest rate based on the average interest rates of your existing loans. You can only consolidate your federal loans one time, and you must apply through the government.

Consolidation locks in a new interest rate  

When you consolidate your federal student debt, the new loan will have a fixed interest rate. Unlike a variable rate loan, your interest rate won’t change. You won’t have to stress about fluctuations and what that might cost you. Of course, that also means if rates go down, you’re stuck with your set rate.  

You can refinance private loans or a combination  

If you have private loans or a combination of private and federal loans, you may be eligible to refinance. Working with a private lender, you gather your existing loans and use the new loan to pay them off. 

Unlike federal consolidation, refinancing allows you to shop lenders to find the best rates and terms. Depending on market conditions and your credit score, you may secure a lower interest rate. Some refinanced loans have fixed rates, while others start fixed and convert to variable after a period, so read the fine print.

Refinanced loans can’t revert to federal or enjoy federal benefits 

Here’s a word of caution: Once you refinance any federal student loan with a private lender, that’s a permanent switch. You can’t change them back to federal loans, and you lose access to any government benefits associated with federal loans, including possible loan forgiveness programs.  

Is consolidating student loans right for me?  

If you’re asking, “Should I consolidate my federal student loans into a federal Direct Consolidation Loan?” gold star for paying attention. If you have multiple federal student loans, consolidation could be a good move. You can simplify your life with one monthly bill, and you might even lower your interest rate and your monthly nut.  

Before you go buy a round at the bar, first things first—you need to get organized. Collect all the documents on your current loans so you can compare payment amounts, interest rates, and terms. Then consider these points:

• Your new loan may have a lower interest rate, but a longer term. That means you’ll be paying off your debt longer. If your existing federal loans have 10-, 15-, and 20-year terms, but the new consolidated loan is a 20-year schedule, you’ll be paying less each month, but for a longer period.
• Your consolidated loan will have a new interest rate. This could be higher or lower than your previous rates, and that will affect the total loan amount. 
• If your new loan doesn’t qualify for some federal loan benefits or credits, you may lose out on those advantages, such as income-driven repayment (IDR) plan or qualifying Public Service Loan Forgiveness payments.
• If you have unpaid interest on existing federal loans, that rolls into your new loan, and your principal balance will increase.
• You don’t have to consolidate all of your federal loans. If some of your loans have benefits you’d lose by consolidating, you can leave those untouched.

Is refinancing student loans right for me?

Whether you have several private loans or a mix of federal and private loans, refinancing allows you to pay off those existing debts and move ahead with a single loan. Your lender pays off your existing loans with a new loan that (hopefully) has a lower interest rate. Before you sign on, review these points: 

• If you have a strong credit score and solid repayment history, you may qualify for a lower interest rate, which will save you money and free up cash for other things. 
• If your new loan starts with a fixed rate and then converts to a variable rate, your principal amount may increase.  
• The refinanced loan may have a lower monthly payment but a longer payment term, stretching out the time you’ll be writing checks. You’re probably making payments online, but you understand our point.  
• If you refinance federal loans, you lose access to credits and benefits, such as loan forgiveness plans.

To consolidate or refinance? That is the question.

With higher-ed costs soaring, you probably needed to borrow money for that liberal arts degree or a top MBA program. If you have a good handle on your student loan repayments, pay on time, and your interest rates seem reasonable, stay the course. 

But, if you want one bill, a lower monthly bill, or to look for better rates, consolidating or refinancing your student loans can be a smart move. Learn more about student loans, use a student loan consolidation calculator to estimate savings, and then shop around with lenders.