Updated August 14, 2018

Should You Consolidate Your Student Loans?

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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.

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. You may also be eligible for a new repayment plan of up to 25 years. Sounds simple right? Watch out there are common mistakes to avoid before choosing consolidation. Read on.

Did you graduate with multiple student loan bills? There are a couple of ways to make them more manageable and lower payments.

Don't confuse these terms. They mean two different things.

Consolidation refers to combining federal student loans, while refinancing refers to getting a new loan from a private lender with a new rate and term.

Which one is right for you? We'll discuss both in detail. Read on.

Federal Student Loan Consolidation

What it does:

  • It is only for federal student loans (NOT for private loans - jump to read about private loan consolidation).

  • It combines your multiple federal loans into one, so that you have fewer accounts to manage.

    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.

  • You get a new fixed interest rate that is the weighted average of your loans.

  • You can pick a new extended term or choose an income-driven repayment plan.

    This may lower your total monthly payments. BUT you may end up paying more over the long term. (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, or applying for an income-driven repayment plan. 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:

  • You can refinance both your private and/or federal loans, unlike Consolidation above.

  • You can get a new better term and lower interest rate, based on your credit and what you qualify for.

  • It is done through a private lender. The private lender pays off your loans and you just make one monthly payment to the lender.

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

Requirements for refinancing:

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

  • Most student loan refinance lenders require that you have a job and steady income (or at least an offer for a job starting soon).

  • Most also require that you have an eligible degree from an eligible school.

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 and/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.

Which Federal Loans Are Eligible for Consolidation?

For consolidation of federal loans, the following are often eligible:

  • Federal Stafford Loans (Subsidized and Unsubsidized)
  • PLUS loans from the Federal Family Education Loan (FFEL) Program
  • Federal Perkins Loans
  • Direct Loans (PLUS, Subsidized and Unsubsidized)
  • Nurse and Health Education Loans

Private student loans are not eligible for consolidation. Those, however, can be refinanced, which we'll discuss later.

Consolidating defaulted student loans: Yes you can consolidate if your loans are in default. You have 2 options:
  • Make 3 on-time payments before you consolidate. The required payment amount will be determined by your loan servicer.
  • Apply for one of the income-driven repayment plans.

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 during the grace period (6 months after graduation).

    In some cases, they may also cover it if you get your loans deferred. Deferments are given for economic hardship, unemployment, and returning to school. During deferment, you don't have to make student loan payments.

  • 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. Repayment generally starts 6 months after graduation.

During deferment, 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. you are given three years of deferment time to be used in six-month increments.

Interest Rate on Federal Loan Consolidations

For consolidation, you will get a fixed interest rate that is a weighted average of your current federal student loan interest rates. Then it's rounded 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. You can use this consolidation calculator to estimate your interest rate and monthly payments.

Consolidation will also switch any variable-rate loans to fixed interest rate loans. Though the government has not disbursed any variable rate federal loans since 2006.

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 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.

Pros and Cons of Student Loan Consolidation

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


  • 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.

  • Can choose to lower your monthly payment, compared to the total payments you made before consolidation.

  • Option to take advantage of an income-driven repayment plan. Many federal loans are ineligible for repayment plans without a Direct Consolidation loan.

  • Can 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.


  • 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.

  • You'll lose any remaining grace period if you consolidate during your grace period. After you consolidate, your first bill will usually be due in about 2 months.

  • 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.

How to Consolidate Your Federal Loans

Here are the steps for consolidating your federal loans:

  1. Start application. Log into studentloans.gov with your FSA ID (or create one). Find the "Apply for Loan Consolidation" button and start the application.

  2. Choose loans. Choose which federal loans you want to consolidate. You must consolidate at least one Direct Loan.

    You will also be asked to list education loans you do not want to consolidate. The DOE will take these into consideration when determining your maximum repayment period.

  3. Select payment plan. You can select between the Standard Repayment Plan, Graduated Repayment Plan, Extended Repayment Plan, or one of the 4 income-driven repayment plans.

    You will have to complete an additional plan request form for the plan you choose.

  4. Pick a loan servicer. When you consolidate, you can choose between FedLoan, Nelnet, Navient, and Great Lakes. If you're already under one of these servicers, you can stay with them too.

  5. Complete application and submit. After signing and submitting it, it generally takes about 2 months for the new consolidated loan to be disbursed. During this time, make sure you're still making payments on your loans.

The Direct Loan Program is the ONLY government program for loan consolidation. You can obtain the Federal Direct Consolidation Loan for free. You should NOT have to pay.

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.

Refinancing Private Student Loans

Up until this point, we discussed consolidating federal student loans. What if you have private student loans?

Luckily, you can do a private student loan refinance. This is often referred to as "private consolidation," but it's not the same as federal loan consolidation at all.

Let's take a deeper look at what it is.

Refinancing is done through a private lender (NOT the government). You can combine several student loans into one new loan, or you can refinance just one loan if you want. You can refinance both federal and private loans.

The goal is to lower the interest rate and get a better term. This will allow you to save a lot on interest over the life of the loan.

Who is Eligible?

Here's the tricky part. You don't automatically qualify. You must pass certain criteria 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.

Interest Rate for Refinancing

The interest rate varies based on the risk you pose to the lender. Riskier borrowers will have higher interest rates. If you have a high credit score and are making good income, you'll receive an interest rate on the lower end.

Shorter terms (like 5 years) will also have lower interest rates than long terms (like 20 years).

Private refinancing offers both fixed and variable rates:

  • Fixed interest rates maintain the same for the life of the loan. This is the better option if you want predictability and need a longer loan repayment period.

  • Variable interest rates typically start lower than a fixed rate loan, but may increase over time based on the market. This may prove to be the better option if you can repay your loans in a shorter period.

A lot of lenders give you the option to switch between fixed and variable rates.

Pros and Cons of Refinancing

Be aware of these pros and cons of refinancing.


  • If your credit has improved since college, you can qualify for a lower interest rate. This can save thousands of dollars in interest.

  • Can choose your own term. Most private lenders offers a variety of terms - from 5 to 20 years. You can pick a shorter term to pay off your loans faster, or a longer term to reduce monthly payments.

  • Make managing payments easier. You'll get just one new loan, which makes it easier than juggling multiple payments per month.

  • Ability to add cosigner. If you're not that creditworthy, you can apply with a cosigner to get a better interest rate.


  • If you refinance federal loans, you lose benefits like federal forgiveness programs and deferment.

  • If your credit isn't great, you can get even a higher interest rate than what you currently have.

  • Locked into your plan. If you pick a 5 year term and then have trouble making payments, you can't just switch to a longer term. However, if you pick a longer term, you can pay your loan off early without penalty (though longer terms have higher interest).

How to Refinance Your Loans

There are a lot of private student loan refinance lenders. In general, here's how it works:

  1. Find a lender. Look around for lenders you feel comfortable with. It's smart to apply to several to compare rates. Credible is a student loan refinance platform where you can compare rates with multiple lenders at once.

    Best companies to refinance student loans:

    • SoFi (for best competitive rates)
    • Earnest (for those with less credit history)
    • Laurel Road (for high balances)
    • LendKey (for small banks and credit unions offers)
    • Splash Financial (for medical school loans)

  2. Get estimated rate. Fill out some general information about your loan balance and income, and the lender will give you an estimated rate within minutes. This is a soft pull on your credit and will make no impact.

  3. Officially apply. If you decide to continue, you'll officially apply. At this point, the lender will do a hard pull and give you final rates and terms based on your credit and other factors.

    Even if you apply and don't like the rates, you are not obligated to continue. Keep shopping around.

  4. Accept offer. Once you accept and approve, the lender will pay off your student loans. After that, you will just make one payment to the lender each month.

Is Consolidation or Refinance Better For Me?

This depends on your personal situation.

Consider consolidation if you:

  • Want to apply for a income-driven repayment plan or other federal forgiveness program.
  • Want to simply your federal loan payments.

Consider refinancing if you:

  • Have private loans with very high interest rates.
  • Your credit has improved since college and you can qualify for a better rate.
  • Want to pick a shorter or longer term.
  • You don't plan to apply for any forgiveness programs.

You can certainly do both too. If you have both types of loans, you can consolidate your federal loans and refinance just your private loans. This way, you can still take advantage of forgiveness programs and get a lower rate on your private loans.

Common Questions

Will consolidating student loans hurt my credit?
Consolidating your federal loans will not hurt your credit. If you're doing a private consolidation (or refinance), the lender will have to do a hard inquiry, which will ding your credit a little bit. But as you make on-time monthly payments, it will help your credit improve.

How long does it take for a student loan consolidation to go through?
For the federal Direct Consolidation Program, it usually takes about 60 days for the new consolidated loan to be disbursed. Still continue to make payments on your loans until then.

Is it a good idea to combine federal and private student loans?
You may lose eligibility for certain federal assistance (like forgiveness programs and deferment) if you group your private and federal loans together. If you want to keep these options, don't refinance your federal loans with your private student loans .

However, if you don't plan to apply for any forgiveness programs, it's smart to refinance them all together if you can get a lower interest rate.

Does consolidation or refinancing student loans cost money?
NO. The government provides the Direct Consolidation Loan program for free. If anyone is asking you for money to help you consolidate your loans, it's a scam.

For refinancing, most private lenders and banks charge no application fee or origination fee. So you should not have to pay for those.

What's the difference between Deferment and Forbearance?
Both will pause your payments in times of financial hardship or job loss. Both are offered up to 3 years total. The main difference is that the government may cover the interest on some loans for deferment. While you are responsible for paying all interest that accrues during forbearance.

What's an Income Driven Repayment Plan?
An income driven repayment plan reduces your monthly payments according to what you can afford based on your income. It extends your repayment term to 20 or 25 years, and any leftover balance at the end of the term will be forgiven.

Bottom Line

Both consolidation and refinancing can help you with your payments.

Consolidation is good to make your federal loans more manageable and/or to take part in Loan Forgiveness Plans. But keep in mind that it does not lower interest. Refinancing is good to get a lower rate so that you save money on interest over the life of the loan. But you lose federal benefits.

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.

Write to Kim P at feedback@creditdonkey.com. Follow us on Twitter and Facebook for our latest posts.

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