It’s not unusual for people to talk about student loan refinancing and consolidation like they’re the same thing, but they’re not.
When you refinance, you take out a new loan with a private lender to replace many different private and federal loans. When you consolidate, you’re combining multiple federal loans into a single loan—a Direct Consolidation Loan with the federal government.
Here’s an overview of how consolidation works—and the pros and cons.
Who can consolidate their loans?
If you have federal student loans, you are eligible for consolidation after you graduate, leave school without graduating, or drop below a half-time courseload.
Even if your loan is in default, you can consolidate. This is often a good move, as you have the option to repay under one of the federal income-driven repayment plans, such as:
- Income-Based Repayment Plans
- Pay-as-You-Earn Repayment Plans
- Income-Contingent Repayment Plans
- Revised Pay-As-You-Earn Repayment Plans
In fact, you may be required to choose one of these plans if you are trying to consolidate a loan in default—unless you can make three consecutive payments on your loan.
What kind of interest rate can I expect?
Direct Consolidation Loans have fixed interest rates. These are determined based on the weighted average of the interest rates on all your loans, rounded up to the closest eighth of a percent.
Why should I consider consolidating my loans?
There are several pros to consolidating your federal loans.
It simplifies your payment
If you have a lot of student loans, paying a number of different lenders every month can be onerous. When you consolidate, you only have to write one check each month.
It extends the term of your loan
When you consolidate, you can stretch out your payment period by as much as 30 years. This can significantly reduce your monthly payments.
You get access to income-based repayment options
Depending on your job, you can also become eligible for Public Service Loan Forgiveness.
It can help you get back on your feet
If you’re in default, consolidation can help you dig your way out. Remember, you’ll need to agree to repay your loan under one of the income-driven repayment plans in order to consolidate on a defaulted loan, or make at least three consecutive payments.
What are the drawbacks to federal student loan consolidation?
If you're considering consolidation, there are a few things to be aware of.
You may pay more over the long term
Most consolidations increase the length of time you have to pay the loan. While this reduces your monthly payment, your interest accumulates over a longer period of time—resulting in more interest payments over the long term.
For this reason, it’s generally better not to consolidate loans you’re close to paying off.
You lose certain benefits
If you have Perkins loans, you should probably avoid consolidating. Perkins loans have their own forgiveness and postponement benefits that are generally more generous than those for direct loan consolidation.
You lose loan forgiveness credit
Some federal loans qualify for forgiveness if you make at least 120 qualified payments. When you consolidate, the counter of payments you’ve made toward forgiveness is wiped clean—and you have to start over at zero.
Carefully consider whether the benefits of consolidation outweigh losing any progress you’ve made toward loan forgiveness.
Consolidating your federal student loans can be a smart move—but it’s not for everyone. If you have private student loans you'd like to consolidate, check out our Student Loan Consolidation Calculator to see how it might affect your finances.