Everything You Need to Know About Student Loan Consolidation

Updated on January 26, 2018

Consolidating your student loans seems like a great way to simplify your life, doesn’t it? But you may wonder how student loan consolidation works, exactly how to do it, and whether you can consolidate both federal and private student loans.

If you had to stitch together a patchwork of loans from different sources to pay for college or graduate school, you’re not alone. With half a dozen bills due at different times each month, you — and millions of other Americans — may struggle to keep track of what you owe and how much interest you’re paying.

You may be able to reduce that monthly chaos by consolidating your student loans into a single monthly bill. But if you’re considering consolidation, you’ll want to understand your options and the potential impacts before you take any big steps.

We’re here to help with answers to your most pressing questions about consolidating your student loans.

What is student loan consolidation?

When you consolidate your student loans, you combine all your separate student loans and pay them off as a single new loan.

Depending on the types of loans you have and your financial goals, you may choose to consolidate through a federal Direct Consolidation Loan with the U.S. Department of Education, or with a private lender as part of a refinancing process.

Federal consolidation won’t reduce your debt or your interest rate, and it may not lower your monthly payment. But it will mean fewer bills.

On the other hand, refinancing with a private lender will probably result in a lower interest rate, but it’s important to note that if you do this, you’ll lose access to special benefits available for federal student loans. (See more below.)

See also: Should I Consolidate My Student Loans?

Is student loans consolidation the same as refinancing?

When people talk about student loan consolidation, they’re generally referring to consolidating federal loans through a Direct Consolidation Loan from the U.S. Department of Education.

However, refinancing with a private lender can also result in joining multiple loans into a single payment. When you refinance, a private bank purchases all your loans and provides you with an entirely new loan and a new, often lower, interest rate that’s based on your debt-to-income ratio and credit history.

You also get a new loan if you consolidate with the federal government, but the resulting interest rate is simply the weighted average of all the interest rates on all your old loans. And it isn’t based on your credit score — which can be a positive if your credit isn’t good, or if you have a fairly new credit history.

However, if you have a high credit score and you consolidate to a federal loan, you may lose out on getting a lower interest rate that could save you thousands of dollars over the life of your loan.

Both federal consolidation and private refinancing allow you the opportunity to:

  • Replace multiple loans with a single monthly bill.
  • Shorten or lengthen your repayment term.

However, if you refinance federal student loans with a private company, you lose access to federal income-based repayment plans and loan forgiveness programs.

See also: Student Loan Refinancing and Consolidation Terms You Need to Know.

Can I save money by consolidating my student loans?

Whether you’ll save money by consolidating your loans depends on your particular situation.

For instance, consolidating your student loans through a federal Direct Consolidation Loan could lower your monthly payments in the short-term if you extend your repayment term, but you may end up paying more over the life of the loan than you’re paying under your current plan.

Here’s why: when you consolidate federal loans, the U.S. Department of Education sets your consolidated interest rate as a weighted average of the interest rates of all your old loans, rounded up the nearest one-eighth percent.

But if you consolidate your loans by refinancing with a private lender, you may qualify for a lower interest rate that could save you money both in the short-term and the long-term. Reducing your interest rate by even 1% could yield thousands of dollars in savings over the life of your loan.

Our Student Loan Consolidation Calculator can help you figure out whether consolidation will save you money.

Is it a good idea to consolidate student loans?

Each borrower’s financial situation is unique, so only you can say whether consolidating your student loans is a good idea for you.

Knowing the pros and cons of consolidation can help you make a decision.

Consolidation through a federal Direct Consolidation Loan helps streamline your monthly student loan payments while allowing you to:

  • Avoid the risk of default.
  • Opt for a longer payment term that could lower your monthly payments.
  • Remain eligible for federal income-driven repayment plans, deferment and forbearance, as well as loan forgiveness programs.

There are also a few things to keep in mind if you’re considering consolidating your loans:

  • If you extend your repayment term with a federal Direct Consolidation Loan, you’ll likely end up paying more interest over the life of the loan.
  • If you’re thinking of consolidating through refinancing with a private lender, the loan shopping process can cause a slight dip in your credit score. Minimize this by limiting your shopping to a 15-day period.
  • Your credit score doesn’t impact your interest rate with a federal Direct Consolidation Loan, but a low credit score could keep you from getting a better interest rate if you pursue refinancing through a private lender. Applying for refinancing with a cosigner may help you get a better rate if you don’t qualify for a competitive rate on your own.
  • If you qualify for Public Service Loan Forgiveness (PSLF) and you’ve already made progress on your 10 years of payments, consolidating through a federal Direct Consolidation Loan resets the clock. Refinancing with a private lender will void your eligibility altogether.

See also: Should You Refinance or Consolidate Your Student Loans?

When should I avoid student loan consolidation? What benefits will I lose?

As we mentioned above, there are some important things to consider before you apply to consolidate your student loans, like whether you’ll lose access to federal benefit programs.

Refinancing with a private lender — and the resulting consolidation of your loans — may not be the best choice for you right now if:

  • You don’t have a steady income. Federal loans come with the possibility of deferment, forbearance, or income-driven plans that you can take advantage of if you hit a financial rough patch.
  • You’re planning to use the Public Service Loan Forgiveness (PSLF) program to get your debt erased after 10 years. You’ll lose eligibility for that program.
  • You have poor credit. A bank will use your credit score to determine the interest rate when consolidating with a private lender. A low credit score may not result in the lower interest rate you want.

If you consolidate your student loans through the federal Direct Consolidation Loan program, you’ll retain eligibility for federal loan forgiveness, deferment and forbearance, as well as income-driven repayment plans.

But any payments you made prior to consolidating will no longer count toward the PSLF program if you’re planning to use it. Remember, consolidating resets the clock.

So if, for instance, you’ve been making payments for five years and are eligible for PSLF, it might be better to manage multiple monthly payments for another five years than to consolidate and wait ten years before your loans are forgiven.

See also: Student Loan Forgiveness: What You Need to Know.

How do I consolidate my federal student Loans?

You can consolidate your federal student loans online through the U.S. Department of Education at studentloans.gov. The whole process takes less than 30 minutes.

But be careful: once you start the application, you can’t save it.

You can also consolidate your federal student loans by refinancing with a private lender. Most lenders have easy-to-use online applications. Before you apply, we recommend comparing terms and repayment options of at least three different companies so you can be sure you’re getting a loan that works best for you.

Once you’ve considered how the monthly payments and total payment amounts will impact your current financial situation, fill out the online application for the bank that meets your needs.

Use our Student Loan Consolidation Calculator to see how consolidation may affect your monthly payments.

How do I consolidate my private student loans?

Private student loans are not eligible for consolidation through a federal Direct Consolidation Loan, but you can consolidate your private student loans by refinancing with a private lender.

With numerous banks offering student loan refinancing, choosing a lender can be overwhelming. We recommend comparing the terms and repayment options of at least three different lenders before you apply.

See our picks for Best Banks for Refinancing and Consolidating.

Once you’ve made a decision, filling out an online application generally takes around 15 minutes.

You’ll need the following documents:

  • Information about your loans, including loan amount (both original and current), interest rate, servicer name and address, and payoff date
  • Your driver’s license, passport, or a bank statement to verify your address
  • Your last month’s pay stubs
  • Your most recent tax return
  • Proof of graduation

See also: Pros and Cons: Private Student Loan Consolidation.

Which student loans can be consolidated?

The federal government offers a Direct Consolidation Loan for most loans, including:

  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • Subsidized Federal Stafford Loans
  • Unsubsidized Federal Stafford Loans
  • Direct PLUS Loans
  • PLUS loans from the Federal Family Education Loan (FFEL) Program
  • Supplemental Loans for Students (SLS)
  • Federal Perkins Loans
  • Federal Nursing Loans
  • Health Education Assistance Loans, and
  • Some existing consolidation loans.

You can consolidate other private and federal loans by refinancing with a private lender.

Remember that if you refinance federal loans with a private lender, you will lose income-driven repayment and forgiveness options.

See also: Can You Consolidate Student Loans With Your Spouse?

When can you consolidate student loans?

You can’t consolidate federal loans through a federal Direct Consolidation Loan until after you graduate, leave school, or drop below half-time enrollment.

You’ll also have a difficult time refinancing federal loans with a private lender if you’re still in school. Banks generally require proof of graduation with an application to refinance. They also want to see a steady income and a good credit score if you’re applying without a cosigner.

If you’re between jobs or have a poor credit history, now may not be the time to consolidate through refinancing.

See also: Can You Consolidate Your Student Loans if You Have Bad Credit?

Can you consolidate student loans that are in default?

You may be able to consolidate student loans that are in default.

If you’ve defaulted on federal student loans, you can usually consolidate through a Direct Consolidation Loan. The default will remain on your credit record, but consolidating can help get you back on track.

However, private lenders will generally not allow you to refinance loans that are in default. If you’ve missed payments on your private loans, contact your lender as soon as possible to discuss repayment options.

See also: How to Get Student Loans Out of Default — What You Need to Know About Loan Rehabilitation.

Should I consolidate my federal and private student loans together? 

Many borrowers end up with a mix of federal and private student loans. The good news is that you can consolidate those loans into a single monthly payment, but there are some important points to note.

First, you can’t consolidate private student loans with the U.S. Department of Education. So if you’re interested in a federal Direct Consolidation Loan, you’ll only be able to consolidate your federal loans.

However, you can consolidate both federal and private student loans together into one loan if you refinance with a private lender. You may also get the added benefit of a lower interest rate and reduced monthly payments.

But because you’re refinancing with a private lender, you will lose access to any federal benefit programs you may have had access to on your federal loans, like income-driven repayment and loan forgiveness. Consider carefully whether you plan to take advantage of these programs before you refinance.

See also: Quiz: Do You Need a Cosigner to Refinance Your Student Loans?

Is consolidating your student loans right for you?

With more options than ever to streamline your payments, managing multiple student loans doesn’t have to be your reality. In less a half hour, you could be mapping a clearer path out of debt.

See our Student Loan Consolidation Calculator to learn more.

Ready to pay off your student loans? Get Started Now!

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