Updated August 14, 2018

Should You Consolidate Your Student Loans?

Consolidating your student loans may lower your payments. But is it always a good idea? Learn the pros and cons of student loan consolidation and refinancing.

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Why You Should Consolidate Your Student Loans: Do you have federal student loans with different servicers and several monthly payments?

Student loan consolidation may help to lower payments and pay only one monthly bill. With consolidation you may be eligible for a repayment plan of up to 30 years. As a bonus, you will be able to switch any variable-rate loans to fixed interest rate loans. Sounds simple right? Watch out there are common mistakes to avoid before choosing consolidation. Read on.

Just starting out in life is tough enough. Now you must figure out how to pay multiple student loan bills? You have options:

Don't confuse these terms. They mean two different things. We'll discuss both in detail.

Federal Student Loan Consolidation

What it does:

  • It brings multiple loans together, so that you have fewer accounts to manage (if you have multiple loans).

    The Department of Education pays off your current loans and starts one new bigger loan. You pay one monthly payment versus many payments of varying dates and amounts.

  • It may lower your total monthly payments. BUT you may end up paying more over the long term. (More on this later.)

  • It will not lower your weighted-average interest rate. (More on this later.)

Requirements for consolidation:

  • You must have federal loans, not private loans. At least one of those loans must be in the Direct Loan Program.

  • You can't be enrolled in school more than half-time.

  • Your loan must be in the grace period or in repayment.

  • If your loan is in default, you must make arrangements to bring it current. Usually this means making 3 timely payments in a row before you can consolidate. If you can't become current, you will need to apply for a loan forgiveness. You can do this before applying for the consolidation loan.

Why consolidation might be better: If you only have Federal student loans, and if you're struggling with your monthly payments, federal loan consolidation might be the better option for you.

Consolidation won't lower your interest rate, but you can lengthen the term of your loan, thereby lowering your monthly payments. You will also retain the ability to apply for loan forgiveness, deferment, and forbearance in the future.

Student Loan Refinancing

What it does:

  • It lowers your interest rate.

  • It works for private and/or federal loans, unlike Consolidation above.

  • It provides you a fixed, affordable term that gets you out of debt faster.

  • It removes some of your federal loan benefits, such as loan forgiveness options and deferment.

Requirements for refinancing:

  • A credit check, meaning you must have reasonably good credit.

  • (None of the other requirements in Consolidation apply here.)

Why refinancing might be better: If you are mainly concerned with lowering the total amount of interest you will pay for your loan, and if you have private student loans, refinancing might be the better option for you.

You can refinance federal or private student loans, but you will have to pass a credit check. This is a good option for people who are able to meet their monthly payments, and who want a lower interest rate.

So, which option is best for you? First, we focus on federal student loan consolidation: how it works and the pros and cons of doing so.

Federal Loans

Look at your current loan documents. Do you have federal loans or private loans? You may have a combination of the two.

For simplicity, we will focus on federal loans only right now. We will talk about private loans later in the article. Among the student loan programs, the following are often eligible for consolidation:

Some loans are usually ineligible for consolidation. They include PLUS loans made to parents and any private student loans. Those are, however, eligible for refinancing, which we'll discuss later.

Tip: You can obtain the Federal Direct Consolidation Loan for free. The Department of Education handles the process through an online login that you created when signing your promissory note for the loans. You will apply directly through them.

Private lenders may offer help with consolidation. They may be offering their own program, though. Make sure you know who you are working with before providing information or money. Keep in mind in the current marketplace of spam and phishing the federal government will only contact you regarding loans and consolidation through mail and phone.

Details on Direct Loans

Remember, to qualify for federal loan consolidation, at least one of your loans must be a Direct Loan. There are several loans in the Direct Loan Program. It is one of the largest student loan programs available. In the program you will find:

  • Direct Subsidized: Loans for students who demonstrate financial need. In this case, the Department of Education covers the interest on the loan. They do this while you are in school and for six months after you graduate. In some cases, they may also cover it if you get your loans deferred.

  • Direct Unsubsidized: Loans for students who do not demonstrate financial need. You pay the interest on the loan without help from the Department of Education. You don't have to start paying it until the repayment period, though.

Deferment: Refers to a period where you don't have to make student loan payments. In some cases, you can reduce the amount you pay rather than stop paying. During this time, interest doesn't accrue on Direct or Stafford Subsidized Loans, Perkins Loans, and the subsidized part of Direct Consolidation and FFEL loans. Interest still accrues on all other federal loans. You can choose to pay the interest only during the deferment or have it added back to the balance of the loan. Deferments are given for economic hardship, unemployment, and returning to school you are given three years of deferment time to be used in six-month increments.

Repayment Period: This period begins six months after you graduate school or stop going to school. It is when your student loan payments begin unless you made other arrangements.

Determining the Interest Rate on Federal Loan Consolidations

You are probably wondering, what's the interest rate? Isn't the whole point of consolidating to lower your interest rate? However, a federal loan consolidation is not a refinance. You will not pay lower interest. This is not a refinance - it's a consolidation.

The Department of Education determines your interest rate as follows:

They take a weighted average of your current student loan interest rates. They then round the result up to the nearest 1/8th. For example, a 4.65% would round up to 4.75%.

This rate may be lower than some of your loans, but it is still a weighted average of all of your loans, and thus not a lower interest rate.

Something important to remember, though, is that you have the option to extend the term of your loans. This helps with lowering your monthly payment amount. But if you do this, you extend how long you pay interest. While the monthly payment amount may be lower, you'll be paying interest for longer, which means you'll be paying more interest over the life of the loan.

If you need to lower your monthly repayment amounts, then this is an option for you. Just make sure you are aware of the full cost of the loan over its entirety.

Not paying your bills has serious consequences, but not paying your federal student loans may be far worse.

  • You could hurt your credit score; letting your federal student loans enter default from nonpayment could cause your credit score to drop by roughly 200 points.

  • Avoiding paying your federal student loans may also ruin your chances of using any federal programs in the future.

Fixed Interest vs Variable: Both variable and fixed interest rate loans can be beneficial. Fixed interest rate loans maintain the same interest for the life of the loan. This can prove helpful if you need a longer loan repayment period. Variable interest rates may start lower than a fixed rate loan, but may increase over time.

A variable loan may prove to be the better option if you can repay your loans in a shorter period. The difference is simple: variable interest rate loans will continue to change and a fixed interest rate loan will stay the same (unless you refinance). Variable interest rate loans are more suited for someone who is certain they can pay off their loan in full, in a year or less.

Pros and Cons of Student Loan Consolidation

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Refinancing requires careful consideration. It makes sense when you can achieve an overall lower interest rate and find a way to better manage multiple loans, says Deborah Sweeney, CEO of MyCorporation.com, which helps entrepreneurs incorporate online. "If you cannot refinance and lower the interest rate on all loans, only refinance those loans for which you can lower the interest rate," suggests Sweeney, who managed to pay off $80,000 worth of student loans over six years. "Do not increase the interest rate on any loans for the sake of consolidation."

Be sure to consider the many several pros and cons of student loan consolidation before moving forward. We discuss both below.


  • It may be easier to stay organized and on time with your payments. A single loan servicer and one payment versus several loan payments per month can make a big difference to you.

  • You may elect to lower your monthly payment, compared to the total payments you made before consolidation.

  • You may have the option to take advantage of a Loan Forgiveness Plan. Many federal loans are ineligible for loan forgiveness without a Direct Consolidation loan.

  • Consolidation could help you stay current on your student loans. This may make you eligible for other federal programs. A few examples include loan forgiveness, forbearance and deferment.

Income Driven vs Deferment: The federal student loans you have start with 3 years of deferment time. Deferments are useful in times of financial strain such as: job loss, a return to school or a hardship. An Income Driven Repayment (IDR) plan offers you low monthly payments valid for 12 months. Both deferments and IDRs can help you to lower payments and pause interest. The biggest difference is that the IDR may result in loan forgiveness and a deferment is a temporary fix.

Forbearance: Refers to a temporary period when you don't have to make student loan payments. It is usually a result of a sudden loss of income or financial hardship. For example, if you fell ill and became hospitalized, you may not be able to pay your loan. Putting it in forbearance until you are back on your feet may help. When you sign the promissory note for your federal student loans you are granted three years of forbearance time through the life of your loans. You may use a forbearance for up to twelve months at a time- check with your loan servicers as some have stipulations about usage.


  • You may stretch out the repayment period. This may mean paying more interest over the life of the loan.

  • Consolidating some loans, such as the Parents PLUS loan into the Direct Consolidation loan, may make you ineligible for a loan forgiveness program.

  • You may lose lender specific benefits that pertain to your loan. A few examples include discounts on interest rates or loan cancellation.

  • Qualifying payments you already made for loan forgiveness may get erased. This means the clock starts ticking again. Most loan forgiveness programs require you to make 120 loan payments before you can have any of your loans forgiven.

Tip: Before you consolidate any student loans, talk to your loan servicer. You can revisit any benefits you may have forgotten about. This way you can make an informed decision. Weigh the pros and cons of leaving the loans alone or consolidating.

If you want to work towards loan forgiveness, be careful. Including certain loans, such as the Parents PLUS loan, may make you ineligible. Always talk to your servicer before making a choice.

Refinancing Private Student Loans

Up until this point, we discussed federal student loans. But there are plenty of private student loans to go around. Private student loans are those not funded by the government. They may come from any bank that offers student loans.

Luckily, you can refinance private student loans refinancing. Let's look at the difference compared to federal loan consolidation and what to expect.

Consolidating or refinancing private student loans works like any other refinance. You may combine several private student loans into one loan or you can refinance just one loan. Usually the goal is to lower the interest rate. In this case, though, you don't get a weighted average of your current loan rates. Instead, you apply for the current rates available.

Here's the tricky part. You don't automatically qualify. You must apply for private student loan refinance. Lenders look at things like:

  • Credit score
  • Income
  • Assets
  • Job history
  • Degree and school history

Tip: Not all majors are created equal. Remember that some degrees are weighted higher than others. What will you get your degree in? Read the Best College Majors for the Future.

Every lender has different requirements. For example, some lenders require credit scores in the 700s to qualify. Other lenders may allow credit scores in the mid-600s. The other factors will likely vary too.

Lenders look at the big picture. For instance, they may look for stable employment or income. They may also look at your education history. If your major qualifies you for a specific job, your future potential income may play a role.

The interest rate they offer varies based on the risk you pose to the lender. Riskier borrowers often have higher interest rates.

Combining Private and Federal Student Loans

All this refinancing and consolidating can get confusing. What if you have both private and federal student loans? Can you combine them? You could. The question is, should you?

Just as we discussed above, you should have a conversation with your loan servicer. Find out what benefits you may miss out on if you consolidate or refinance. However, you may lose eligibility for certain federal assistance if you aren't careful. For example, don't refinance your federal loans with your private student loans.

Does this mean it's wrong to refinance your federal loans into a private loan? It doesn't. It's a personal decision. Weigh the pros and cons. See if you are eligible for any type of loan forgiveness. If you are, it may be best to leave your federal student loans alone. You may be able to consolidate them to get a lower payment, but be careful.

Bottom Line

Consolidating your student loans may be a great idea. It depends on your circumstances. Look closely at your loan types. Also look at what Loan Forgiveness Plans you may be eligible to receive. Take the necessary steps to obtain the help you need.

Before making any decisions, we recommend you talk to your servicer. You could also contact the U.S. Department of Education first or log on to the National Student Loan Data System (NSLDS) to view your loan information. This way you can make sure you exhausted all your options before you proceed.

Disclaimer: Opinions expressed here are author's alone. Please support CreditDonkey on our mission to help you make savvy decisions. Our free online service is made possible through financial relationships with some of the products and services mentioned on this site. We may receive compensation if you shop through links in our content.

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