College students are expected to know a lot of terminology when deciding how much money to borrow.  Unless your major is in finance or accounting, definitions to terms like consolidation, refinance, interest rate, and default might sound like a different language. Kids as young as 17 are expected to understand the magnitude of going into debt for college when many don’t even have a checking account yet. Why aren’t their prep courses for dealing with college loans like there are for the SATs? Learning how loans work and your responsibilities for paying them back would probably be more useful than learning about 17th century impressionist painters, but I digress.

For graduates struggling to repay their student loans, terms like refinance and consolidation are important to understand. Because if you can’t pay your loans, those are usually your only two options. If you’re overloaded with debt, refinancing and consolidation could be realistic options to reduce your burden, but they mean very different things.

Consolidation vs Refinancing

The goal of both these options is to make college debt (or really any debt) more manageable, but there’s one key difference. When you consolidate a loan, you’re combining multiple loans into one larger one. If you’re refinancing, you’re replacing an existing with a new one, presumably with a lower interest rate.

Consolidation

Consolidation is a great way to keep your head above water if you’re struggling to pay. Say you have multiple loans from different providers. You’ve got a $40,000 loan from one debt servicer and a $60,000 loan from another. You’re paying two monthly bills- $350 a month to the first loan and a $500 monthly bill from the second. That’s $850 going out to two different sources, each with their own late fees and penalties.

By consolidating, you’ll combine those two loans into one. For example, the government offers Direct Consolidation Loans to student borrowers wishing to combine their federal loans. Since you’ll only be paying one lender, the monthly payments will become more manageable. But this isn’t a free transaction – you’ll be charged interest on the new consolidated balance, which usually means paying interest on interest. Combining $100,000 worth of loans won’t cost you $100,000, so be sure to weigh your options when considering consolidation.

Refinance

Multiple loans are off the table when it comes to refinancing. Some lenders use these terms interchangeably, but refinancing usually happens when a borrower’s financial situation improves. Most student borrowers don’t have detailed credit histories. Credit cards and mortgages are out of reach for most people before college, so college attendees are viewed as risky investments. But after graduating, getting a job, and boosting your credit score, a new and improved loan might be awaiting you.

If your credit score was 580 when you borrowed money for college and now it’s 709, you can probably get a better rate on your loans by refinancing. You’ll take out a new loan (with a lower interest rate and better terms) to pay for the existing loan, either from your current lender or a different one. Many online lenders exist with better terms than traditional institutions, so be sure to check out your options if your credit score has ramped up over the years.

What to Do?

The choice to consolidate or refinance (or do nothing) depends on your own unique situation. If you have manageable federal loans with a 5% interest rate, inertia is probably the best decision. But if your credit score is above the national average and your student loan interest rate isn’t, it might be time to act. Refinancing or consolidating your student loans could make your life easier and save thousands of dollars in the long run.

Dan Schmidt

Dan graduated from college with a degree in journalism and about $25,000 in student debt. He luckily landed in a career that allowed him to pay his loans off at a reasonable rate, but not without making some sacrifices (sorry grandmom). Dan buried himself in personal finance books to better manage his debt and start saving for retirement. He thinks $25,000 is more than enough to pay for a good education and is stunned by some of the near six-figure balances he sees student borrowers carrying around.

Born 45 minutes north of Philadelphia, Dan went to Penn State in 2004 to pursue a journalism degree with a minor in political science. He graduated into the worst recession in 80 years and got his first post-college job serving hamburgers and Miller Lite. Dan eventually settled in as a purchasing agent at a printer manufacturing company, which isn’t a profession you’d think would be #2 on a journalist’s list.

Dan now lives in Elkins Park, PA with his girlfriend, who graduated with over $80,000 in student debt herself after getting an education degree from Arcadia University. Seeing a new teacher forced to pay nearly $1000 a month in loans drove him to action and LoanGifting gave him a platform to not only help his significant other, but all kinds of borrowers struggling with student debt. Dan’s hobbies include poker, weightlifting, and watching the Eagles beat the Patriots in the Super Bowl twice a week on BluRay. His writing has been published on Benzinga, Fora Financial, and Credit Donkey.