Article 6 min read

Consolidating your student loans: Federal Direct Consolidation vs Refinancing

student loan

Student loan debt has become a nagging issue for many in the United States, including over 40 million college students and graduates. The total student loan debt tally has breached $1.5 trillion and the national default rate on student loan debt is over 10%. Both of these numbers are eye opening and possibly ominous.

With the size of the loans and stagnating wages, student loan repayment can be a challenge for many borrowers. The standard 10-year repayment term may not be a perfect fit for everyone. Luckily, there are alternatives to the standard plan. There are income-driven programs out there, but most are job specific and deserve it's own post. We are going to go over the main options for consolidating and refinancing your student loans.

The Federal Direct Consolidation Loan program allows federal student loan borrowers to combine their loans into one consolidated payment. Student loan refinancing is when you use a private bank or lender product that allows borrowers to refinance and combine their loans into one payment. Both have benefits and drawbacks. Let's jump in to see the similarities and differences.

Federal Consolidation

Starting with federal consolidation, this loan program is offered by the federal government. Borrowers can apply for a consolidation loan and use it to pay off multiple old federal loans. After, they make payments on one single federal loan, making for a simpler repayment. The loan comes with a new repayment term as well as interest rate.

Student Loan Refinancing

Student loan refinancing is similar, but instead is offered by private banks and lenders. Borrowers can apply for a refinance student loan and use it to pay off multiple federal and private student loans. Afterwards, they are left to pay off one loan with a new interest rate and repayment term.

It’s easy to see there are similarities between the two, but there are also big differences to consider – which you may have already noticed.

Now that you have an understanding of these two programs, it’s important to know there are inherent differences between them. They can be helpful in different situations and borrowers, but not all. Here’s a breakdown of these differences:


To start, the providers of student loan refinancing and federal consolidation are different. The federal consolidation loan program is offered by the Department of Education of the federal government. Conversely, student loan refinancing is a product that is offered by private banks and lenders, not a government entity.

Eligibility Criteria

There are significant differences in eligibility. Starting with loan type, the federal consolidation loan program does not accept private student loans, so only federal student loans can be consolidated through the program. With student loan refinancing, both federal and private student loans can be refinanced and consolidated. Aside from these basic requirements, there are big differences in an individual’s eligibility for either option.

Federal student loan borrowers can consolidate through the consolidation program if they have Direct Loans or FFEL Program loans currently in repayment or in the 6-month grace period. The loans cannot be in default, but it is still possible to qualify if opting for an IDR repayment plan or after making three monthly payments.

Since student loan refinancing is a private loan product, eligibility is based on certain underwriting criteria. Lenders check an applicant’s credit score and income for a refinancing application. Qualified applicants generally have high income and great/excellent credit, but it is still possible to qualify with strong credentials in one category (ex: very high income and moderate credit).

New Interest Rate

The new interest rate on your consolidated loan is determined differently depending on refinancing or federal consolidation.

Federal consolidation loans comes with weighted average interest rates. In short, the rate is derived by taking a weighted average of the previous loans in account. The cost of the interest rate will be roughly equivalent to the combined cost of the previous rates.

Contrarily, student loan refinancing rates are underwritten based on the credentials of the applicant. As mentioned, there are different eligibility criteria in a refinancing application, and these criteria factor into the new interest rate. It’s not an average of previous rates, but a new rate offer from a private lender. The cost of the new interest rate may be lower or higher than the combined cost of the previous rates.

Available Repayment Terms

Student loan consolidation through the federal government offers a variety of repayment terms, but they may seem limited in terms of length. Borrowers can only choose repayment terms ranging from 10 to 30 years, but there are no options short of 10 years. However, repayment plans include income-driven repayment (IDR: REPAYE, PAYE, IBR, or ICR), standard repayment, graduated repayment, and extended repayment programs.

Student loan refinancing offers fewer repayment plan types, but more flexibility with repayment terms. Depending on the lender, refinancing applicants can choose from terms ranging from 5, 7, 15, 20, to 25 years. However, there are no income-driven or graduated repayment options.


A federal consolidation loan allows borrowers who are struggling to reduce their monthly payments. By extending the repayment term, the loan amount is broken out over more monthly payments, reducing each individual cost. This can be extremely helpful to someone who is close to defaulting on federal student loans. Furthermore, repayment programs such as IDR and graduated or extended repayment offer a degree of flexibility moving forward.

Student loan refinancing offers a chance to secure a lower interest rate. Creditworthy applicants may receive a low rate on their student debt, which save money during repayment with lower interest payments. Borrowers also have the option to reduce monthly payments by extending repayment if needed.

Both choices offer a chance to streamline finances. For some borrowers, keeping track of multiple monthly payments, due dates, and balances is annoying and confusing. At worst, a payment can be missed. Consolidation with either the federal government or private lender combines these payments into one monthly obligation.


It’s not all good; there are drawbacks to consider for both.

While federal consolidation may help avoid default, it is also the costlier option of the two. The weighted average interest rate does not equate to a rate reduction, so there is no room to save money on interest payments. Furthermore, the minimum repayment term is 10 years. Unless consolidating immediately before repayment starts, borrowers are forced to extend repayment which adds to interest costs over repayment.

Although student loan refinancing offers lower interest rates, borrowers may not even qualify for these rates. As mentioned, applicants must have high income and great credit, and low-rate refinance loans are generally offered to the highly qualified. In addition, refinancing federal loans with a private lender negates federal benefits; for example, a borrower would lose access to income-driven repayment programs.

Understand Your Motivation

Both options have their merits, but before jumping in, you need to understand how these benefits can help you. It’s even more important to understand how their drawbacks could hold you back or hurt you. By knowing the pros and cons of each choice, you’ll be able to make the best decision for you.

Andrew Rombach is a Content Associate for Lendedu – a website that helps consumers and small business owners with their finances. When he’s not working, you can find Andrew hiking or hanging with his cat Colby.