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Updated on Tuesday, November 13, 2018
Keeping track of multiple student loans from several different loan servicers gets confusing fast. Fortunately, you can simplify student loan repayment through combining multiple student loans into a single payment.
There are two ways to combine many loans into one: through federal student loan consolidation or via private student loan refinancing. Although the term “consolidation” is sometimes used to refer to both these options, consolidation and refinancing have some key differences.
For instance, federal consolidation only applies to federal student loans, and it doesn’t lower your interest rate. Refinancing, on the other hand, can combine federal and private student loans together, and it could get you a lower rate.
Both approaches have advantages and drawbacks, so it’s essential to weigh the pros and cons before making any changes to your student loans. This full guide will take a deep dive into how to consolidate student loans, as well as compare consolidation and refinancing so you can decide which strategy is right for you.
Student loan consolidation vs. refinancing: The basics
While both consolidation and refinancing can combine several student loans into a single loan, they do so in different ways. This chart shows the key differences between consolidating student loans and refinancing them.
Note that while both consolidation and refinancing can combine loans, you don’t actually have to include more than one loan. There could be benefits to consolidating or refinancing a single student loan.
For instance, a parent borrower might consolidate a parent PLUS loan to make it eligible for Income-Contingent Repayment, which cuts your monthly repayment amount. Or a student might refinance a single student loan to get a lower interest rate and save money.
Even if you have several student loans, you can also cherry-pick one or two to consolidate or refinance, depending on what would be most beneficial.
What is federal student loan consolidation?
Consolidation turns one or more of your federal loans into a new loan, possibly with a new term length. For this, you’ll need to apply for a direct consolidation loan from Federal Student Aid.
You can combine most types of federal student loans, including direct loans (also known as Stafford loans), as well as parent PLUS or grad PLUS loans, and federal family education loans (FFELs).
You’re typically eligible to consolidate school loans once you’ve graduated, withdrawn from school or dropped below half-time enrollment.
6 pros of consolidating student loans
Federal student loan consolidation comes with a variety of benefits, as well as some drawbacks. Let’s look at benefits first.
1. Simplify repayment by combining multiple loans into one
If you consolidate multiple loans, you turn them into a single loan. Instead of having multiple payments each month, you’ll just make one payment toward your new, consolidated loan. You will only have to remember a single interest rate and one loan servicer.
According to a 2017 report from Experian, the average student loan borrower has 3.7 loans. Consolidating these could simplify repayment and make it more manageable.
2. Opportunity to choose a new repayment plan and adjust your monthly payment
When consolidating student loans, you can choose a new repayment plan. You can return to the standard 10-year plan with fixed payments, or you can lower your payments via the graduated repayment plan, in which the payment amounts increase over time. Likewise, you can extend your terms and lower your monthly payment on an extended repayment plan, or choose an income-driven plan which will cap your payments based on your disposable income.
Choosing something long-term will keep you in debt for longer and means you pay more interest overall, but it also could lower your monthly payments. If you’re struggling to keep up with high bills each month, choosing a longer term could save your budget.
3. Chance to choose a new loan servicer
Along with choosing a new repayment plan, you’ll also get the chance to choose a new loan servicer. Your options for federal loan servicers are:
- Great Lakes (now owned by Nelnet)
- FedLoan Servicing (PHEAA)
- Granite State – GSMR
- OSLA Servicing
- Debt Management and Collections System
If you’ve had a good experience with your current loan servicer, you can stick with them. But if you haven’t, you’ll get the chance to switch and hopefully have better communication with the next.
4. Make parent PLUS loans eligible for Income-Contingent Repayment (ICR)
Parent PLUS loans are designed for parents who are helping pay for their child’s education. But they’re only eligible for one income-driven repayment plan — ICR — and only after the borrower has first consolidated the loan.
After turning your parent PLUS loan into a direct consolidation loan, you can select ICR as your repayment plan. ICR adjusts your payments to 20% of your discretionary income or to the amount your payment would be on a 12-year fixed plan, whichever is lower.
If you still have a balance at the end of the term on your income-driven term (25 years), it could be forgiven.
5. Rehabilitate student loans that are in default
Federal consolidation is also one way to rehabilitate student loans that are in default. If you fall behind on payments, your student loans could go into default, which could result in a host of bad consequences.
Your credit score could plummet, for instance, and the federal government could garnish your wages, tax refund or even Social Security benefits. If your loans are in default, it’s essential to pull them out and get them back in good standing.
One option for doing this is consolidating the defaulted student loans into a direct consolidation loan and placing them on an income-driven repayment plan. Your defaulted loan will be eligible after you make three consecutive, on-time payments.
Once your loan is out of default, it will once again be eligible for federal programs and protections, such as forbearance and deferment.
6. It’s free to apply, and there’s no credit check
Anyone with federal student loans can apply for a direct consolidation loan at no cost. If a company is charging you a fee, beware: You can easily complete the application on your own for free.
What’s more, you don’t need to pass a credit check or meet an income threshold to qualify. As long as you have qualifying loans, you can consolidate.
4 cons of consolidation
Along with the advantages of federal consolidation, there could be some downsides to consider. Make sure you understand the potential cons before applying for a direct consolidation loan.
1. You could get a slightly higher interest rate
Federal consolidation doesn’t get you a lower interest rate. In fact, it could actually result in a slightly higher interest rate.
When you consolidate multiple loans, Federal Student Aid determines your new rate by taking the weighted average of your interest rates. Then, it rounds up to the nearest one-eighth of 1%.
This isn’t a big increase, but be aware that consolidation won’t save you money on interest.
2. You’ll pay more overall if you choose a longer repayment term
Not only will consolidation not save you money on interest, but it could cost you more overall if you choose a longer repayment term. For instance, income-driven plans extend your terms to 20 or 25 years.
Your monthly payments will become more affordable, but you’ll also fork over a lot more in interest over the life of the loan. The only way to save on interest would be to pay off your loan ahead of schedule.
Of course, lowering your monthly payments might help your budget in the short term. But make sure you understand the long-term consequences before adding years to your debt.
3. Your previous payments won’t count toward PSLF or forgiveness from an income-driven plan
The federal government offers a few options for loan forgiveness after years of qualifying payments. The Public Service Loan Forgiveness (PSLF) program, for example, awards loan forgiveness after 10 years of working in a qualifying organization.
And income-driven plans, such as Income-Based Repayment or Pay As You Earn, end in loan forgiveness if you still have a balance after 20 or 25 years. To qualify for any of these programs, you must make a certain number of on-time, consecutive payments.
When you consolidate, though, you reset the clock on your payments. Any payments you made before you consolidated wouldn’t count toward the PSLF or income-driven plan requirements. You’d have to start over again, which could mean you won’t see forgiveness for many more years.
Note that if you’re working toward PSLF, you should put your loans on extended repayment or an income-driven plan right away. If you stay on the standard 10-year plan, you won’t have any balance left to forgive after 10 years of service.
4. Private student loans aren’t eligible
Finally, private student loans are not eligible for federal consolidation. You can only bundle federal student loans into a direct consolidation loan.
So if you borrowed from a private lender, such as Sallie Mae or LendKey, you would still have to pay these back separately with your assigned loan servicer.
How to consolidate student loans and apply for a direct consolidation loan
If you’re wondering how to consolidate student loans, rest assured the process is easy. According to Federal Student Aid, most people complete the application in less than 30 minutes.
You can apply at StudentLoans.gov with the consolidation loan application and promissory note. Before logging into your account with your FSA ID, collect the personal and financial information listed in the “What do I need?” section. For instance, you’ll need your loan documents to complete the form.
Along with providing your information, you’ll also indicate which loans you want to consolidate, and which ones you don’t (if any). You’ll also choose a repayment plan, whether it’s the standard plan, graduated repayment, extended repayment or an income-driven plan.
Make sure to read over your application before hitting submit, and speak with your loan servicer if you run into any confusion during the process.
Student loan refinancing can also combine multiple loans into one
Federal student loan consolidation isn’t the only way to replace several loans with a single student loan. You can also achieve this through student loan refinancing. While you consolidate school loans with the federal government, you would refinance with a private lender. This lender might be a bank, credit union or an online lender, such as SoFi or CommonBond.
Both federal and private student loans are eligible for refinancing, and you can refinance one loan or several together. Not only could this simplify repayment, but you might also qualify for a lower interest rate. Plus, just as with the federal student loan consolidation, you’ll get the chance to choose new repayment terms.
Refinancing can be a savvy strategy for saving money on your student loans and restructuring your debt, but first, you’ll need to qualify.
3 pros of student loan refinancing
So what are the advantages of refinancing student loans? Here are three big ones.
1. A single monthly payment is easier to track
Refinancing is similar to consolidation in that it can combine several loans together. Your refinancing provider, or the loan servicer it partners with, will be your new loan servicer.
If you refinance a Navient loan with SoFi, for instance, SoFi would be your new point of contact. And you’ll only have to keep track of one payment, instead of budgeting for multiple payments each month.
2. You could secure a lower interest rate
If you qualify for a refinancing offer, you could snag a lower interest rate on your student loans. SoFi has variable rates starting at 2.25% and fixed rates from 2.99%, for example. These are significantly lower than the 5.05% attached to direct loans or the 7.6% on PLUS loans.
Cutting your interest rate can go a long way toward saving you money on your debt. With less interest to keep up with, you might even be able to pay off your loan more quickly.
3. You’ll get to choose new repayment terms on your loan
Along with choosing a variable or fixed rate on your refinanced student loan, you can also pick new repayment terms. Most lenders offer terms from five years up to 15 or 20 years.
If you can swing higher monthly payments, you could choose a short term to get out of debt fast and save money on interest. If you need some relief, on the other hand, you could reduce your payments with a longer term but pay more interest throughout the life of the loan.
Note that you can always throw extra payments at your student loans without penalty. So even if you need to choose a longer term now, you can still prepay your loan if your income increases in the future.
3 cons of refinancing
Although saving money through refinancing might sound ideal, make sure you understand the potential disadvantages before applying.
1. You’ll lose access to federal programs and protections
Refinancing federal student loans with a private lender means you turn them into a private loan. And private loans are not eligible for federal protections or programs, such as PSLF.
If you’re relying on any federal options, it wouldn’t be a good idea to refinance. Similarly, you might not want to refinance if you’re concerned about your ability to repay the loan.
Private lenders don’t usually offer as much flexibility as the federal government does when it comes to repayment. For instance, they don’t have income-driven repayment plans, and only some lenders offer forbearance or deferment if you go back to school or run into economic hardship.
So before you refinance, find out which, if any, benefits your lender offers to borrowers. If you’re concerned, you might wait to refinance until you’re confident you have a steady income and the means to pay back your loan on time.
2. You need to pass a credit and income check to qualify
Unlike consolidation, not everyone will qualify for refinancing. Since you apply with a private lender, you’ll have to meet its underwriting requirements for credit and income. The criteria are in place to ensure you have the financial means to pay back any money you borrow.
3. You might have to apply with a cosigner
If you can’t qualify on your own or are trying to get the lowest rates possible, you could apply with a creditworthy cosigner, such as a parent. By signing onto the loan, your cosigner will share responsibility for your debt.
This might not be a problem if you and your cosigner are on the same page about sharing debt. But if you can’t pay back the loan, this agreement could ultimately do damage to your cosigner’s finances, not to mention your relationship with that person.
Before adding someone to your student loan, make sure to set clear expectations about who will pay back the loan and what will happen if you run into financial hardship. Also, find out if your lender offers cosigner release. Some will remove your cosigner from the loan after a few years of on-time repayments.
How to refinance your student loans with a private lender
Since there are lots of lenders that provide student loan refinancing, you’ll want to shop around to find one with the best offer. Along with finding the lowest interest rate, you might consider additional factors, like customer reviews or extra benefits, such as forbearance or cosigner release.
Banks, credit unions, and online lenders provide student loan refinancing. Some online lenders, such as SoFi, CommonBond and Earnest, make it easy to prequalify and check your rates from your computer or phone.
You’ll provide a few pieces of information, and these lenders will show if you prequalify. This check only takes a minute, and it won’t impact your credit score at all. Note, however, that when you choose a lender and submit a full application, you will need to consent to a “hard” credit inquiry, which can reduce your credit score slightly.
Once you’ve chosen a lender, you’ll submit basic information, such as your name, address, degree, university data, total loan debt and monthly housing payment. You’ll also provide proof of income and official statements for any private or federal student loans you wish to refinance.
As soon as you’re approved, you can choose your repayment term, as well as select a fixed or variable interest rate.
Make sure you keep paying off your old loans until you’re 100% certain your refinanced loan is up and running. You wouldn’t want to fall behind on payments before everything has been processed, so wait for your new lender to give you the green light before you forget about your old student loans.
Federal consolidation vs. refinancing: Which is the right choice for you?
Since both federal student loan consolidation and private student loan refinancing come with pros and cons, how do you decide which one is right for you? The decision comes down to your needs and goals as a borrower.
If you’re looking to simplify repayment or get out of default while at the same time retaining eligibility for federal repayment plans, consolidation would likely be the better choice. But if you’ve been paying your student loans for a few years and have a steady income, refinancing could be a wise strategy for saving money on your debt — and maybe even paying off your student loans ahead of schedule.
Take the time to understand your options so you can make the right choice with your student debt. By doing your due diligence, you’ll be able to find the strategy that best helps you manage your debt as you work toward paying it off in full.