Student Loan Consolidation vs Refinancing – What’s Best for Your Finances? Skip to main content

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Student Loan Consolidation vs Refinancing – What’s Best for Your Finances?


Student loan refinance

Is refinancing or consolidating your student loans the right move?

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When you graduate college with student loans, it’s not just one big loan. It can be lots of smaller ones. To make things worse, they won’t all automatically fall under the same student loan servicer. It can leave you with a frustrating task when you want to request a change to an income-driven repayment plan or need a deferment, forbearance, or even answers to a question. Two ways to make your loans easier to manage are consolidation and refinancing. But what’s the difference and is either a good option for you?

What is student loan consolidation?

Consolidation is a concept that only applies to federal student loans. It combines all your federal loans into one larger loan. That means you’ll have only one loan servicer and one point of contact. However, you should be cautious about student loan consolidation even though it sounds convenient.

Student loan consolidation can only be done once over the life of your student loans and is a powerful tool. It’s a way to pull you out of student loan default. That makes it a great option to keep in your back pocket to protect you against future problems with your student loans.

If you ever go delinquent then into default, you can use consolidation to rehabilitate instantly (bring back into good standing) your student loans, get on an income-driven plan and get a “reset” on your college debt. Don’t consolidate just for the heck of it – think carefully!

What is student loan refinancing?

Student loan refinancing is a different concept from consolidation. Refinancing is when you restructure private student loans into a new loan. It can also refer to refinancing federal student loans into a private loan. In either case, the loan company pays off your old loans and writes you a new one.

In some cases, taking federal loans private can be advantageous. In other cases, it might not be wise. Here’s a look at the pros and cons of pursuing this option:

Pro: You may get a lower interest rate than you had on your federal loans.

Con: You lose the option of deferment and forbearance to pause payments.

Pro: You won’t be subject to the far-reaching debt collection power of the government.

Con: You lose access to income-driven repayment plans like IBR, PAYE, REPAYE, etc.

Pro: You can pay off loans faster and possibly for less than with federal loans.

Con: You won’t be eligible for Public Student Loan Forgiveness (if you were considering it).

Private loans vs. student loans – default, collection, and bankruptcy

Another concern with converting federal loans to private loans is what happens if you can’t pay the debt. If you can’t afford the payments, the federal government can garnish your wages, take your income tax returns, and put a lien on your property.

Private lenders do not have these awesome powers of collection. Also, federal student loans have no statute of limitations, meaning they can follow you to the grave. Private student loans are like any other type of consumer debt such as credit cards and medical bills.

If you default on the debt, a clock starts ticking on the day the debt goes “bad,” and after three years of no payments or activity or you signing any new loan agreements, the lender loses the right to sue you in court. It takes away the legal “teeth” on the debt.

Private student loans are also easier to discharge in bankruptcy than federal loans. However, it is possible to shed federal student loans in bankruptcy if you can prove undue hardship or other circumstances such as the school defrauding you.

The bottom line is that you should think hard before you convert federal student loans to private. There are pros and cons to each and what’s best depends on your unique circumstances. To find out more about student loans in bankruptcy, contact us today.

Read reviews from our clients, then call +1-919-646-2654 to schedule a free student loan bankruptcy consultation at the Law Offices of John T. Orcutt in one of our locations in Raleigh, Durham, Fayetteville, Wilson, Greensboro, Garner or Wilmington.

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