Time dollar sign if you need a loan, there are several ways to simplify your life and reduce your costs. The two most common options include debt consolidation and refinancing.

You may need to do one or both, so get familiar with what they do (and don’t do) for you. First, it is useful to clarify the differences between student consolidation and loan refinancing.

Consolidation Vs. refinancing

Consolidation Vs. refinancing

Consolidation happens when you combine multiple loans into one loan. The concept is a big one for one: Instead of dealing with a few separate loans, monthly payments, and billing statements, you can put everything together and cover it with one payment. If you prefer, you can call this “simplification” instead of consolidation.

Refinancing is when you replace a loan (or multiple loans) with a brand new loan, ideally a much better loan. The goal is often to get a lower interest rate so you can reduce your living expenses and your monthly payment.

When you refinance, you can also consolidate at the same time (paying off multiple loans with a new loan). Instead of a refinancing term, you might think of it as “optimizing” your debt so that you pay less.

True consolidation makes sense (and this is only possible) if your student loans originally came from government programs.

You can consolidate private loans by pooling multiple loans together, but the main benefits of consolidation are reserved for government loans.

Debt consolidation programs can also cause confusion: programs are services provided by credit counseling agencies and similar organizations. The idea is that the agency will negotiate with creditors to make payments more affordable.

You make only one payment, but the payment goes to the agency, which then pays you more credit.

Federal loan consolidation

Federal loan consolidation

When you have multiple federal student loans, you can consolidate those loans using a direct consolidation loan. The interest rate you pay as a whole will not change – you will end up with a weighted rate on your last loan, which is effectively the same amount you paid on those loans separately.

That uniform rate will apply to all the debts you have consolidated, which may or may not matter (if you somehow had one high-credit loan over other loans, you might be better off paying it aggressively instead of adding it to your consolidation loan). Interest rates are fixed on these loans.

Consolidation can also give you the ability to change your repayment schedule. For example, you may be able to extend repayments over 25 years instead of a shorter period. However, a longer repayment period means that you will pay more interest over the life of these loans, and you will enjoy lower monthly payments today at the expense of higher overall costs.

What about combining federal student loans with private loans? This you can do if you use a private lender (and not through federal loan consolidation), but will carefully evaluate the decision: when you put a government credit to private lenders, you lose the benefit of federal student loans.

For some, those benefits are not helpful, but you never know what the future holds, and some features like delaying and returning based on revenue can help you one day.

Refinancing with Private Lenders

Refinancing with Private Lenders

A private loan consolidation is only an option if you refinance your debt. In the private market, lenders may be willing to compete for their loans, and you get a good deal if you have good credit. As credit scores change over time, you may be able to do better if you have been paying on time for several years.

Refinancing can help you simplify, but it really saves money. If you can get a lower interest rate (or some other advantage), you will be in a better position. Again, it is possible to increase your repayment over the coming years – every time you refinance you begin the repayment process – but it can cost you in the long run.

To see how this works, familiarize yourself with loan amortization (which is the process of paying off a loan).

When you refinance, you will end up with a fixed or variable loan. Make sure you understand how the rate works, and what happens if interest rates change – will your monthly payments increase one day?