Student Loan Consolidation

A student loan consolidation combines some or all of your federal student loans into a new, easy-to-manage loan. While consolidating your loans can extend your term and lower your monthly payment, you might also pay more interest and lose certain benefits.

Note that you can only consolidate federal student loans — not private loans, which you would need to refinance in order to combine into a single loan.

Consolidation vs. refinancing

The terms “consolidation” and “refinance” are often used interchangeably, but each has key differences.

Federal student loan consolidation

What is federal loan consolidation?

A Direct Consolidation Loan simplifies repayment by combining separate federal student loans into a single loan — with one monthly payment.

If you have multiple federal student loans, you might have several student loan servicers managing your loans and payments. As a result, it could be easy to lose track of a loan and forget a payment.

Consolidating streamlines your bills, which can make managing your student loan debt easier.

Interest rates and terms

Like all other federal student loans, Direct Consolidation loans use a fixed interest rate, keeping your monthly payment consistent.

The consolidated loan term can extend to 30 years, and if you lengthen your term, then your monthly payment amount will likely drop. But be aware, a longer term also generally means you’ll pay more interest over the life of the loan than you would with the standard 10-year repayment plan.

The weighted average of your consolidated loan rates will determine your new loan’s rate, rounded to the nearest 1/8 of a percent. If some loans have a significantly higher interest rate, consolidating could be beneficial.

However, consolidating isn’t for everyone. You could potentially lose valuable borrower benefits. Plus, a longer term means you’ll likely pay more interest in the long run, thus increasing your total student loan debt.

Federal student loan consolidation pros and cons

Should I consolidate my federal student loans?

The decision to consolidate depends on your unique situation, such as your loan types, current debt and long-term financial goals.

A Direct Consolidation Loan could be a smart move if you want…

• A lower monthly payment. Consolidating usually extends your repayment term, thus lowering your monthly bill. While this can offer immediate financial relief, entering a longer repayment term will likely result in more paid interest. That said, being able to manage your payments today could be worth the extra long-term cost.
• The ease of a single payment. Keeping tabs on multiple student loans can take extra brain work. It also puts you at risk of forgetting a payment, which could hurt your credit and future loan eligibility. Streamlining your payments into one (and maybe enrolling in autopay) could help reduce the mental burden of student loan debt.
• Access to an IDR plan. If you have federal family education loans (FFEL), Perkins or PLUS loans, you’ll need to consolidate them before applying for certain IDR plans.
• Access to student loan forgiveness. Perkins and FFEL loans are only eligible for certain student loan forgiveness programs, such as PSLF, if you consolidate them via a Direct Consolidation Loan first.
• To get your loans out of default. Dealing with a student loan default can be challenging. While loan rehabilitation is one option, it can take several months to complete. In comparison, consolidating your defaulted loans is generally faster.

But despite its many benefits, it’s important to note the following downsides of federal loan consolidation:

• A longer repayment period. Your new repayment term could extend up to 30 years. Your total education debt determines your consolidation loan’s new term.
• More paid interest. The longer it takes to repay your loan, the more accrued interest you’ll end up owing.
• Capitalized interest. If any of your loans have unpaid interest, that interest will automatically be added to your consolidated loan’s principal — a process called capitalization. Basically, you’ll end up paying interest on top of interest.
• Loss of certain borrower benefits. You could lose certain benefits when you consolidate loans other than Direct loans, such as interest rate discounts or principal rebates.
• Discontinued progress toward PSLF or IDR plan forgiveness. Although certain loans need to be consolidated to be eligible for PSLF and IDR forgiveness, your Direct loans could lose credit for qualifying payments after consolidation. Basically, the clock could be reset and you would need to start from scratch. There is an exception though — see “Warning: Consolidation and student loan forgiveness” above.

When deciding whether consolidation is right for you, make sure to consider deferment or forbearance for short-term relief from payment difficulties. There are also a few refinancing options worth pursuing.

Private student loan consolidation (refinancing)

What is private student loan consolidation?

Like federal student loans, you can also combine private student loans into a single monthly payment. But rather than using consolidation, you would refinance via a bank, a credit union or an online lender.

Remember, this is quite different from the federal Direct Consolidation Loan, as outlined above.

Important: It’s best to avoid refinancing federal student loans since you’ll lose federal benefits and protections.

Interest rates and terms

Many refinance companies offer both variable and fixed interest rates. While a variable rate could give you immediate savings, you risk paying more if rates jump higher.

Term options typically range from 5 to 25 years. A shorter term will reduce your total interest charges if your budget can afford the higher monthly payments.

Pros and cons of consolidating student loans privately

Lenders may offer you a reduced interest rate on your student loan refinance based on your creditworthiness. The lower your interest rate, the more you can save over the life of your loan.

However, if you’re not able to secure a loan with a lower interest rate than you’re currently paying, there may be little benefit to refinancing, beyond lumping all your loans into one or switching away from a problematic lender.

Also note that private student refinance loans might have a variable interest rate, making your monthly bill unpredictable.

When to consider private student loan consolidation

If you can snag a lower interest rate, refinancing your student loans could save you a bundle of money over time. For example, changing your interest rate from 8% to 5% on a $10,000 loan with a 10-year term could save you $1,831.

However, lenders generally require a reliable source of income and a good credit score to qualify for the most competitive rates. Check your credit score to see where you stand. Alternatively, you can add a creditworthy cosigner to your application to increase the likelihood of getting the best rate.