Student loan consolidation can help simplify your finances, and depending on your situation, it may even save you money. But there can be drawbacks, so it’s important to weigh those before moving forward.
Here’s everything you need to know about consolidating your student loans, whether you have federal or private student debt.
When you consolidate your student loans, you combine your existing debts into a single loan. Depending on the type of consolidation you choose (federal or private), it may also result in a lower interest rate or different repayment term. Either way, it can help you move to a new student loan servicer or lender and simplify your monthly payments.
Federal student loan consolidation is offered by the government via a Direct Consolidation Loan, which doesn’t rely on your credit to qualify.
“For [federal] consolidation, I like to describe it as just combining multiple loans into one, so it isn’t going to get you a lower interest rate,” explained Kendall Meade, a certified financial planner at SoFi, an online bank and lender that offers student loan refinancing.
Private consolidation, or student loan refinancing, works much differently. You generally must have adequate credit (or a qualified cosigner) to be eligible. You might also secure more favorable terms, like a lower interest rate or shorter repayment term, depending on your existing loans and financial history.
You can also refinance federal loans, but that turns them into a type of private student loan. That means you lose access to certain federal protections, like income-driven repayment (IDR) plans that can lead to debt forgiveness, as well as deferment options.
If you have federal student loans, you can use the Department of Education’s Direct Consolidation Loan program to combine your existing debts. This gives you a single, fixed-rate student loan, simplifying the repayment process if you currently have multiple accounts with various loan servicers.
However, this process doesn’t offer any savings on interest. When you complete a federal consolidation, your new interest rate is a weighted average of your current rates, rounded up to the nearest eighth of a percent.
It’s completely free to apply for the consolidation program, and most borrowers qualify for it. You can apply online in about 30 minutes on the Federal Student Aid (FSA) website. Select the loans you want to consolidate, choose a repayment plan, and agree to the terms and conditions to complete the application.
Federal student loan consolidation has its perks, including:
However, there can be downsides to federal consolidation, too:
If you’d like to consolidate private student loans, the only way to do so is with student loan refinancing. While this allows you to combine multiple loans into one debt, you could also secure a lower interest rate or change your repayment term.
The first step is to research and compare lenders, as interest rates and loan terms vary. Once you’ve found some lenders you like, you can submit an application with each. Each lender will review details about your existing loans, income, credit history, and other factors to determine your eligibility and the interest rates you qualify for. If approved, you’ll sign the final loan agreement and the lender will complete the refinance process on your behalf.
Related: Learn more about refinancing your student loans on Credible.com
You may be able to take advantage of the following benefits with student loan refinancing:
Refinancing has some cons, such as:
If you aren’t able to qualify for refinancing on your own, or you want to score more favorable terms, adding a cosigner to your application can be a useful option.
A cosigner is a family member or friend with good to excellent credit who agrees to share responsibility for your loan. However, their credit is equally affected by your debt. If you miss a payment, it could negatively impact both of your scores. And if you can’t repay the loan in full, your cosigner will have to take over payments.
Because of this responsibility, a cosigner should be someone you can communicate openly with and trust. You might also prioritize lenders that offer a cosigner release. Through this process, you can remove your cosigner from the loan after meeting certain conditions — typically, you must make a certain number of consecutive, on-time payments to be eligible.
Lenders may also have specific requirements for cosigners, so make sure your cosigner is eligible before submitting an application.
It’s important to weigh your options when consolidating your student loans. Take the following into consideration before making your choice:
In addition to standard repayment options, consolidating your federal loans through the Department of Education can give you access to IDR plans. These cap your payments at 10% to 20% of your discretionary income and forgive any remaining balance at the end of your term.
If you consolidate your federal loans, you may be eligible for:
It’s important to note that not every Direct Consolidation Loan is eligible for each of these plans. If you consolidated parent PLUS loans, for example, you have fewer repayment plans to choose from.
To compare your options, you can use the FSA’s Loan Simulator to find the best repayment plan for you.
Private student loan refinancing typically doesn’t give you access to borrower-friendly repayment plans, such as those offered for federal loans, though options vary by lender. Before you finalize your loan, you’ll usually get to choose your loan term and repayment plan. You can view your estimated monthly payments, how much interest you’ll pay, and when you’ll be out of debt.
However, if you later have trouble making your payments, contact your lender to see what they can do to help. Many lenders offer temporary solutions, such as pausing your loan payments for a few months or adjusting your payment amount.
Related: Learn more about refinancing your student loans on Credible.com