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Consolidating Student Loans: What You Need to Know

Consolidating Student Loans: What You Need to Know
Rebecca Safier
Rebecca SafierUpdated November 15, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Student loan consolidation has the potential to make repaying your student debt easier and simpler. Through consolidating, you can combine multiple loans into one for a single monthly payment, as well as lower your monthly bills so they’re more affordable. There are two types of student loan consolidation: federal consolidation and private consolidation, also known as refinancing. Both types have key differences. By understanding how each process works, you can pick the type of consolidation, if either, that is right for you. 

What Is Student Loan Consolidation?

Student loan consolidation typically involves combining multiple student loans into one. Instead of dealing with different interest rates and monthly payments, you can pay off a single loan after consolidating. While combining multiple loans into one is a common feature of consolidation, it’s not always part of it. It’s possible to consolidate a single loan through the federal government or private company to access other perks, such as selecting a new repayment term or, in the case of private consolidation, getting a better interest rate. In other words, you don’t necessarily have to consolidate multiple loans; you can choose to consolidate just one. As mentioned, there are two main ways to consolidate student loans: 
  • Federal student loan consolidation: You can consolidate one or more federal student loans you borrowed from the U.S. Department of Education by applying for a Direct Consolidation Loan. 
  • Private student loan consolidation: You can consolidate one or more federal and/or private student loans with a private company, such as a bank, credit union, or online lender. This process is commonly referred to as refinancing. 

How Does Student Loan Consolidation Work?

Both federal and private student loan consolidation requires an application process — they don’t happen automatically. Anyone who has federal student loans can apply for federal consolidation on the Federal Student Aid websiteThe requirements for private student loan refinancing, however, may be loftier. You’ll need to have good credit and a stable source of income to qualify for private student loan consolidation. If you can’t meet a lender’s criteria on your own, you may be able to boost your chances of approval by applying with a cosigner. Either way, there’s no fee to apply for federal or private loan consolidation. Some private lenders charge an origination fee to disburse your new loan, but many don’t charge this fee and offer the process for free. 

Federal Student Loan Consolidation

Federal student loan consolidation is only available for federal student loans, such as Direct loans and FFEL loans. You can apply for federal student debt consolidation directly on the Federal Student Aid website at no cost. When you apply, you can choose which federal student loans you’d like to consolidate and which you’d like to leave out, if any. You’ll also get to choose new terms for paying off student loans, typically up to 30 years, depending on your loan amount. You might select an income-driven repayment plan if you’d like your student loan payments to be based on your income. The plans set a percentage of your student loan you will pay that is not greater than a set amount you select, such as 10%. Note that federal loan consolidation does not lower your interest rate. Instead, your rate will be the weighted average of your previous rates rounded up to the nearest one-eighth of a percent. 

Private Student Loan Consolidation

Private student loan consolidation or refinancing involves exchanging one or more of your student loans with a new loan from a private lender. This lender could be a bank, credit union, or online lender. One of the main perks of refinancing your student loans is qualifying for a lower interest rate. If you have good credit, you might be able to get a lower rate than you have now, thereby saving money on your student loans. Plus, you can choose new repayment terms, typically ones that span five to 20 years. As mentioned, you’ll need to meet a lender’s criteria for credit and income to qualify for refinancing. Both federal and private student loans are eligible. However, refinancing federal student loans with a private lender means forfeiting access to federal protections. Your new, refinanced student loan will be private, so it won’t qualify for federal repayment plans or forgiveness programs. If you want to retain access to federal programs, you could consider refinancing your private student loans while leaving your federal student loans alone. 

Typical Student Loan Consolidation Rates

Your student loan consolidation rates will differ depending on whether you apply for federal consolidation or private refinancing. When you apply for federal consolidation, your new rates will pretty much match your old rates. As mentioned, your new rate will be the weighted average of your previous ones rounded up to the nearest one-eighth of one percent. Private refinancing, on the other hand, could lead to a better rate on your student loans. Every lender is different, but some are offering rates as low as 3.575% at the time of writing. Because no two lenders are the same, it’s worth shopping around and comparing your offers to find the best rate. Many lenders let you prequalify online with a soft credit check, which won’t impact your credit. Although your offers aren’t guaranteed, they give you a sense of what you could qualify for if you were to submit a full application. By checking your rates with multiple lenders, you can find the most attractive offer. 

Pros and Cons of Consolidating Student Loans

Whether you’re considering federal or private student loan consolidation, both processes have their pros and cons. Let’s take a closer look at the advantages and disadvantages of both, starting with federal loan consolidation. 

Advantages of Federal Student Loan Consolidation

Simplify Repayment 

Consolidation can simplify repayment by letting you combine multiple loans into one. Instead of juggling several payments with different due dates and loan servicers, you can make a single payment to one loan servicer every month. 

Change Repayment Terms 

When you consolidate student loans, you can also choose new repayment terms. Depending on your loan amount, you could select a term of up to 30 years. By extending your terms, you’ll have a lower payment from month to month. Note that you can always prepay your student loans ahead of schedule without penalty. 

Make Loans Eligible for Certain Repayment Plans 

Consolidating may also be necessary to make certain loans eligible for specific repayment plans. For example, you can only put parent loans on the Income-Contingent Repayment plan if you consolidate them first. Along similar lines, you have to consolidate FFEL or Perkins loans to get them on an income-driven plan. Income-driven plans are the only federal repayment plans that qualify for the Public Service Loan Forgiveness (PSLF) program. If you’re pursuing PSLF for any FFEL or Perkins loans, you may need to consolidate them and get them on an income-driven repayment plan. 

Get Out of Default 

Direct loan consolidation is also one of two ways to get federal student loans out of default and back into good standing. To get your loans out of default, you must agree to put them on an income-driven plan after you consolidate or make three full monthly payments before you consolidate. Besides consolidation, your other option for getting federal student loans out of default is student loan rehabilitation. 

Disadvantages of Federal Student Loan Consolidation

Does Not Lower Interest Rate 

One downside of federal student loan consolidation is that it doesn’t lead to a lower interest rate. If reducing your interest rate is a priority, it could be worth exploring private student loan refinancing. 

May Increase Your Costs of Borrowing 

Consolidating your student loans also has the potential to increase your costs of borrowing if you select a longer repayment term than you have now. The longer you’re in debt, the more interest charges you’ll have to pay. Although extending your loan terms can make your monthly payment more affordable, it could lead to higher loan costs in the long run. 

Could Restart Clock on Public Service Loan Forgiveness 

Although consolidating your loans may be a necessary step on the road to PSLF, proceed with caution. Consolidating your loans can restart the clock on any progress you’ve already made toward loan forgiveness. To qualify for PSLF, you need to make 120 on-time payments. But consolidating can force you to start over at zero, even if you’re already several payments in. 

Could Trigger Interest Capitalization 

Finally, one downside of Direct loan consolidation is its potential to trigger interest capitalization. In other words, any outstanding interest that your loan balance has accrued could be added to your principal balance. Then, you’d pay back this new, larger balance, along with future interest charges that accrue. 

Advantages of Private Student Loan Consolidation

Now let’s consider the pros and cons of private consolidation, starting with the pros. 

Get a Better Interest Rate 

Perhaps the greatest benefit of private student loan consolidation is the potential to get a better interest rate. Let’s say you owe $55,000 at an 8.00% rate. Lowering that rate to 5.00% could mean a difference of $10,073 over 10 years. Reducing it to 3.0% increases that difference to $16,346. Lowering your interest rate even a small amount could make a big impact over time. 

Choose New Repayment Terms 

Along with getting a new interest rate, you can also choose new repayment terms. Most lenders let you choose terms anywhere from five years up to 20 years. Opting for a shorter term will help you get out of debt faster, while a longer term could lead to lower monthly payments. When weighing your options, use a student loan calculator to estimate both your monthly payments and the long-term costs of borrowing. 

Simplify Repayment 

As with federal consolidation, private consolidation lets you combine multiple loans into one. You can consolidate private loans, federal loans, or a mix of both, depending on which approach would give you the greatest benefit. 

Release a Cosigner 

Many students take out private student loans with a cosigner, often a parent. If you want to get your cosigner off the hook for your student debt, you could try refinancing those loans in your own name. 

Disadvantages of Private Student Loan Consolidation

Give Up Federal Repayment Plans 

Although it’s possible to refinance federal student loans with a private lender, you should proceed with caution. Refinancing federal loans means you’ll no longer have access to federal repayment plans, such as income-driven repayment. If you suspect you’ll need an income-driven plan in the future, you may be better off leaving your federal student loans as they are. 

Lose Access to PSLF 

Along similar lines, refinancing federal student loans can make them ineligible for federal forgiveness programs, such as PSLF or certain military student loan forgiveness programs. If you’re pursuing federal loan forgiveness now or in the future, avoid turning your federal loans into private ones. 

Forfeit Federal Emergency Protections 

Finally, refinancing federal loans also makes them ineligible for federal emergency protections, such as deferment and forbearance. Some lenders offer temporary forbearance if you lose your job, but this option isn’t guaranteed. 

When Is It a Good Time to Consolidate Your Student Loans?

You can consolidate student loans almost anytime it would be beneficial to do so. If you’re pursuing Direct loan consolidation, you’ll have to wait until you graduate or drop below half-time enrollment to be eligible.As for private refinancing, you may be able to apply while you’re still in college, but some lenders require that you’ve already graduated. Chances are, you can’t qualify on your own without a cosigner until you’ve graduated anyway. It might be a good idea to spend some time improving your credit before you apply so you can get the lowest rates. If rates drop further, you could refinance multiple times to maximize your interest savings. 

The Student Loan Consolidation Process

The student loan consolidation process differs depending on whether you’re taking the federal or private route. You can apply for federal consolidation online in about 30 minutes. You’ll need your FSA ID, along with some personal and financial information. When you apply, you’ll indicate which loans you want to consolidate and select a repayment term. If you’re pursuing private refinancing, you can start by checking your rates online in a few minutes. Compare your offers, including rates, terms, and any benefits specific to the lender. If you find an offer you like, you can submit a full application and consent to a hard credit check. You may need to upload supporting documentation, such as loan statements and pay stubs. If the lender approves your application, it will pay off your old loans and issue a new one in their place. You’ll get set up on a new repayment plan and start making payments on your new, refinanced student loan. 

Student Loan Refinancing Options

If you’re interested in refinancing your student loans for lower rates, find out how Lantern can connect you to student loan refinancing offers.
Photo credit: iStock/Inside Creative House
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Frequently Asked Questions

Can consolidated student loans be forgiven?
What is the typical interest rate for student loan consolidation?
Why do people consolidate their student loans?

About the Author

Rebecca Safier

Rebecca Safier

Rebecca Safier has nearly a decade of experience writing about personal finance. Formerly a senior writer with LendingTree and Student Loan Hero, she specializes in student loans, financial aid, and personal loans. She is certified as a student loan counselor with the National Association of Certified Credit Counselors (NACCC).
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