What’s the Difference Between Federal Student Loan Consolidation and a "Private Consolidation Loan"?

If there’s anything clear about student loans, it’s that the terminology associated with student loans is often far from clear.  Take the words “consolidate” and “refinance,” for example.  Both of these fall into the category of “things you can potentially do with your student loans” and as a result they’re often used interchangeably.  But the terms can have different implications based on the context in which they’re being used.

So here’s the scoop:

If you consolidate student loans through the federal loan consolidation program, you’ve simply combined multiple federal loans into one loan, with a resulting interest rate that’s a weighted average of the original loans’ rates.  This is often not a money-saving strategy because your overall interest rate has not decreased.  In fact, if consolidating reduces your monthly payment, it’s likely a result of lengthening your loan term, which can result in paying more interest over time.  It’s also important to note that private loans are not eligible for this program.

Contrast that with a “consolidation loan,” which some private lenders offer.  The term “consolidation loan” is a bit of a misnomer, because unlike federal loan consolidation, the lender evaluates your financial data to offer you a new interest rate that isn’t simply an average of your prior rates.  Technically, this is student loan refinancing.  Like student loan consolidation, refinancing can also result in combining multiple loans, but hopefully you’ve gotten a better interest rate in the process. If you lower your resulting interest rate through refinancing, you can potentially lower your monthly payments or reduce your loan term, and you’ll save money on total interest over the life of the loan.  Most private lenders will only refinance other private loans, but SoFi will refinance both private and federal loans.

Why is it important to know the difference?  Because confusing these terms can lead to not knowing your student loan options, which can lead to leaving money on the table.  For example, one of the biggest student loan myths out there is that borrowers are unable to refinance previously consolidated loans.  And the truth is, that simply isn’t true – at least not for SoFi.

Whether you previously consolidated federal loans through the Direct or FFEL consolidation programs or you consolidated private loans through a private lender, you can still apply to refinance the consolidated loan with SoFi just the way you could with any other federal or private student loan.  If you’re looking to refinance a federal loan, you should first consider whether you might be giving up any benefits such as eventual loan forgiveness or income-based repayment plans – these features generally do not transfer over to a private lender.  But if you’re confident in your ability to repay, you’re not eligible for these federal benefits and your main goal is to save money on your loans, refinancing might be a great strategy for you to consider.

And refinancing with a lender like SoFi can have great benefits of its own.  In addition to the potential cost savings (an average of $11,783 per borrower*), our members enjoy access to valuable career coaching and job search assistance, as well as support for entrepreneurial goals.  Not sure if refinancing is right for you?  Give us a shout – we’ll walk you through the details.

*Savings calculation is based on SoFi borrowers who refinanced between 5/21/14 and 7/2/14. Prior to refinancing, these borrowers had on average a $71,000 loan balance, a rate of 7.07% and a lifetime payment of $99,239, assuming the standard Direct Loan term. After refinancing, these borrowers have an average lifetime payment of $87,456 based on a weighted average of new rates received across both types (fixed and variable) and all terms offered by SoFi with AutoPay. Savings calculations assumes borrowers make all payments in a timely manner and do not prepay.