Student loan refinancing vs. consolidation: Which is right for you?

The chance to begin to turn your future goals into reality. That was the whole point of going to college, right? But life after graduation comes with it's own challenges. Between handling your own finances and bills, paying rent or a mortgage, and repaying student loans, it can be a lot to manage it all.

Refinancing or consolidating your student loans could help you take greater control of your finances. But what's the difference between these two options? And which option will make a difference in your life?

Refinancing and consolidating: The big difference

In the world of student lending, the terms "refinancing" and "consolidating" are thrown around a lot. Though they mean different things, both options have a common purpose: to make paying your student loans easier by allowing you to combine multiple loans into one single loan with one monthly payment. The biggest difference lies in what each option can do for you. The goal of refinancing is typically to receive a lower interest rate or lower your monthly payment. Consolidation is intended to help students gain greater control of federal student loans by simplifying monthly payments.

Got it? Let's take a closer look at each option.

Student loan refinancing: It's about saving money

To pay for college, you may have used a mix of loans from private lenders and loans from the federal government. The interest rates, balances, and terms for each of those loans may vary. Some of your loans may have variable rates while others have fixed rates. Student loan refinancing, which can only be done with a private lender, is designed to help you combine multiple student loans — federal and private — into a single, more affordable loan.

The benefits of refinancing may include:

• Lower monthly payments: A lower rate means a lower bill each month and more cash in your pocket. Plus, you could save thousands of dollars in interest over the life of your education loan.
• Flexible repayment terms: With a lower interest rate, you may be able to choose a shorter term, potentially allowing you to pay off your education loan sooner without increasing your monthly payments. Alternatively, you could extend the term of your loan beyond the 10-year standard repayment period to 15 or 20 years. While this could help you lower your monthly payments, it would result in paying more interest over the life of the loan.
• Easier paying: When you refinance all your student loans, you may be able to simplify multiple student loan payments into one payment.

Sounds great, right? But there's a little more to it. Keep in mind that when you apply for a refinancing loan, a credit check will be part of the application process. Lenders will review your credit quality (and/or your cosigner's, if applicable) when determining eligibility and the interest rate on the loan. Another important thing to know: When you use a private loan to refinance a federal loan, you're converting that federal loan to a private loan. So, if you want the benefits that come with federal loans, such as income-based repayment options and loan forgiveness, you don't want to include your federal loans in your refinance. Instead, you could choose to just refinance your private loans.

Student loan consolidation: Have greater control over your federal loans

If you have federal loans and want to maintain the protection and other benefits that come with them, you have another option — consolidation. Federal loan consolidation involves combining all your existing federal student loans into a single loan with the federal government.

There's another key difference with consolidation: The fixed interest rate for your consolidated loan will be a weighted average of all the interest rates on your current federal loans rounded up to the nearest 1/8%.

Let's say you have six federal student loans. Three of them have a 5% interest rate; the other three have a 7% rate. Using the weighted average, your new interest rate if you consolidated would be 6%. That means three of your loans will experience a rate increase and three would have a decrease. However, consolidating would result in having a single loan at an interest rate of 6%.

Consolidating does offer some great benefits, including:

• Maintain federal student loan benefits: One of the biggest benefits of consolidating is that it allows you to maintain your federal loan protection benefits, including income-based repayment terms and loan forgiveness. So if you expect your income to decrease or if you think you'll pursue a career in a field that qualifies for loan forgiveness, consolidation may make sense for you.
• Easier paying: You'll only have to manage one loan and make one payment each month for all your eligible federal loans.
• Extended terms for lower monthly payments: You can choose a longer term, allowing you to lower your monthly payments. However, extending the term may increase the overall total cost of the loan.

Another thing to keep in mind is that you can always explore refinancing your federal loans with a private lender at a later date when you may not need those federal protection benefits. It costs nothing and could help you lower your payments in the future.

Which is better for you?

The option that's right for you depends on a number of factors, including your goals, the types of loans you have, the current interest rates, whether you need federal benefits, and your credit quality and income.