Thousands of students take out student loans to finance their education, with many of them requiring more than a single loan over the course of their enrollment. These loans may be federal or private, and each individual loan often has a unique interest rate and term length.
When it comes time to repay these loans, you might consider consolidation. Student loan consolidation involves combining multiple loans with varying interest rates and repayment terms into one new loan with a set interest rate and term length. While this is a benefit to those who need it, consolidation isn’t for everyone.
Student loan consolidation is the act of combining several student or parent loans into a single, larger loan from one lender. Consolidating enables you to manage all of these debts with a single payment.
Some reasons you might choose to consolidate your loans include lowering your overall monthly payment, lowering the total amount of interest you’ll pay over time, or gaining access to federal forgiveness programs by consolidating federal loans.
Private loans can’t be consolidated with federal loans into a single federal loan, but you can consolidate (or refinance) both types with a private lender. But tread carefully — you’ll lose access to benefits and protections only available with federal loans by doing so.
| Important: Interest rates for all federal loans are currently set at 0% and all payments for student loans are paused. The pause will expire 60 days after June 30, 2023, or after litigation on student loan forgiveness has been decided, whichever comes first. |
The two main types of student loan consolidation are:
- Federal consolidation loans: Federal Direct Consolidation Loans are available to federal student loan holders. This type of consolidation offers the borrower access to the federal protections and benefits available to Direct Loan holders, such as Public Service Loan Forgiveness. These loans take the average of your interest rates and make that your new rate.
- Private consolidation loans: Private consolidation loans, also known as refinancing, allow a borrower to combine both private and federal student loans into a single loan. These new loans are offered through private lenders, which means the borrower will lose all federal benefits and protections.
Student loan consolidation is different from refinancing. When you refinance your student loan, you’re replacing your old loan with a new one that has a potentially lower interest rate.
It’s recommended not to refinance your federal loans with a private lender and instead consolidate them into a Direct Consolidation Loan from the Department of Education. You’ll manage one payment, and terms can be up to 30 years.
| Federal Consolidation | Private Refinancing | |
|---|---|---|
| Type | Combines federal loans into one Direct Consolidation Loan with one monthly payment. | Refinances and pays off your old loans with a new one, usually with a lower interest rate. Can refinance federal and private loans. |
| Interest rate | A fixed-rate that is calculated on the weighted average of your loans, rounded up to the nearest one-eighth of a percent. | Depends on the lender, but can be fixed or variable. |
| Repayment terms | 10-30 years | 5-20 years |
| Loan eligibility | Most federal loans can be consolidated. Only parent PLUS loans are not eligible. | Private and federal loans are eligible to refinance, however, if you refinance federal loans, you’ll lose access to government benefits and protections such as forbearance, income-driven repayment plans, and student loan forgiveness. |
If you’re a federal loan holder, the general requirement is that you must no longer be enrolled in your degree program. This may be because you graduated, left school, or dropped below half-time enrollment. However, a PLUS loan taken out by a parent for a student cannot be consolidated.
Private loans are not eligible for consolidation under a federal plan. If you’re refinancing your student loans through a private lender, it’s important to research their eligibility requirements. Many lenders favor borrowers with higher credit scores and low debt-to-income ratios. They may also require verifiable proof of income, usually at a minimum limit.
| Keep in mind: Even if your income and credit report aren’t ideal, you’re still eligible to consolidate a federal loan. If you’re looking to refinance, you might be able to secure a private loan by adding a cosigner. |
Pros
Cons
When it comes to refinancing with a private lender, the most appealing benefit is the potential to lower your interest rate; the biggest drawback is the loss of current and future federal benefits. The flexibility to combine both federal and private student loans under a refinance lender — and the ability to switch loan servicers if needed — are two other significant benefits.
However, it’s important to remember that private refinancing lenders might not be able to offer you a lower rate, especially if your credit is poor. Also, a lender may offer a shorter repayment term length to help you repay your loans faster, but it’s likely that this will cause your minimum monthly payment to increase.
To consolidate your direct federal loans, you’ll need to complete the Direct Consolidation Loan Application.
To consolidate any of your student loans via a private student loan refinance, you’ll need to choose a private refinancing lender.
Related: Learn more about refinancing your student loans on Credible.com
Before you consolidate your federal loans, first identify if you’re eligible for any forgiveness plans or income-based repayment plans, like the Public Service Loan Forgiveness Program. Keep in mind that consolidating into a private loan will cause you to lose current and future benefits, some of which might be more advantageous in the long term than the potential short-term benefits of consolidation.
Before refinancing private loans, be sure that you investigate multiple lenders to see which company can provide you with the best rates, service, and streamlined processes.
Student loan consolidation may be right for you if:
Consolidation may not be the best option for you if:
If you’d rather get a lower interest rate, and possibly lower monthly payments, your best bet is to refinance. With refinancing, you can replace your current loans with a new loan at a different interest rate, and opt to refinance a single loan.
| For example: Let’s say you want to refinance a $35,000 loan that has a 9% interest rate and a remaining term of 10 years. Your current monthly payment would be about $443 a month. But if you refinanced your old loan into a new one with a 5% interest rate and a 12-year repayment term, your new monthly payment would be $324. Research and shop around to compare the best offers from multiple lenders. |
Related: Learn more about refinancing your student loans on Credible.com