Most college graduates leave school with a number of different student loans, racked up throughout their years of study. Each of these loans can come with different terms, payments, servicers and statements. The sheer amount of numbers and other information can be difficult to track.
If you feel overwhelmed with managing your student loan debt, don’t panic — you do have options. One way to make student loans easier to deal with is through federal and private student loan consolidation.
When you consolidate your debt, you combine all those loans into one. You do this by taking out a new loan for the amount of the balances of the existing loans, use the newly borrowed money to repay all the older debt, and then focus on repaying your one new loan.
This simplifies your financial situation and makes your debts easier to keep track of. Other benefits of consolidation could include securing more favorable interest rates (if you also refinance) and lower monthly payments (by extending your repayment term).
Federal and private student loan consolidation: What you need to know
Before you choose to consolidate your loans, examine your situation carefully to determine if this is the best course of action. This isn’t a solution that works well for everyone.
Consolidation doesn’t always result in a lower interest rate — even if you refinance — and lower monthly payments usually mean paying the loan over a longer period of time and spending more on interest.
You also need to know that the process is different for federal student loans and private student loans, especially if you’re trying to manage both kinds of loans. Private lenders may be able to consolidate both private and federal loans, but you cannot roll private loans into a new federal Direct Consolidation Loan.
And just because you can use refinancing to consolidate private student loans together with your federal loans doesn’t mean it’s a good idea either. Doing so eliminates any benefits or eligibility for federal repayment plans or loan forgiveness that you could have received from a federal program.
If you think you’ll need an income-driven repayment plan or want to pursue federal forgiveness options, it’s best not to mix federal and private loans.
Should I consolidate my federal student loans?
When you choose to consolidate your federal student loans, the government will combine all your separate debts into a single new loan, known as a Direct Consolidation Loan. You can apply once you graduate, otherwise leave school or become enrolled less than half-time; these events will trigger the start of your repayment.
Most federal student loans are eligible for consolidation, including subsidized and unsubsidized Direct loans, subsidized and unsubsidized federal Stafford loans, Direct PLUS loans and others. Although the Perkins loan program came to an end in September 2017, old Perkins loans are still eligible for consolidation, as well.
If you have a PLUS loan in the name of a parent, that loan cannot be transferred to the student during consolidation. Also, you can’t consolidate a defaulted loan until you make a repayment agreement with the loan’s servicer or agree to repay the new consolidated loan with one of the government’s eligible repayment plans.
Pros of consolidating federal student loans
- Direct Consolidation loans offer one single payment and potentially lower monthly payments.
- Consolidating federal loans is free via the federal government. Beware of companies which offer to help you consolidate federal student loans for a fee.
- No credit check is required to consolidate federal student loans, and you can apply online.
On the other hand, if you’re only interested in simplifying your situation, consider finding other ways of tracking your debt and managing repayment. That’s because Direct Consolidation Loans have drawbacks, too.
Cons of consolidating federal student loans
- A lower monthly payment means paying the loan over a longer period of time, which will cost you more money due to interest charges.
- When you consolidate your federal student loans, you lose the ability to strategically target your highest interest and/or highest balance loans using a method such as the debt avalanche or debt snowball.
- Federal consolidation doesn’t result in a better interest rate. Rather, the new rate is a weighted average of all the interest rates on your student loans, rounded up to the nearest one-eighth of a percentage point.
- Some federal consolidation loans may come with higher interest rates than private loans. For example, the average interest rate for Direct unsubsidized loans for graduate or professional students is 6.6%, while some student loan refinancing lenders offer rates below 3% if you qualify. That difference can really add up over time — you can check our refinancing calculator to see how much.
Be sure to explore all your options and weigh which benefits — those from Direct Consolidation loans or those from other strategies, such as refinancing — will help you the most.
Should I consolidate my private student loans?
While private student debt isn’t eligible for federal loan consolidation, you can still consolidate your private loans by refinancing with a private lender. Requirements and eligibility will vary from one financial institution to another.
Some private lenders may require you borrow a minimum amount. Some might use different criteria to evaluate your creditworthiness than others. It’s best to reach out to individual lenders to ask for their specific rules around eligibility. You can compare the results to determine what might be a good fit for you.
Some of the benefits and drawbacks of consolidating your private student loans are similar to those for consolidating federal loans:
Pros of consolidating private student loans
- You may benefit by creating an easier-to-manage financial situation, getting better terms or securing lower monthly payments.
- One big benefit of consolidating private student loans through refinancing is potentially securing a much lower interest rate. Your rate will be based on your creditworthiness or that of a cosigner.
- If your credit score has significantly improved from the time you took out your loans, or you have built a solid income and employment history, you’re more likely to get a low rate that could make refinancing a smart financial move.
Cons of consolidating private student loans
- When considering consolidation, keep in mind whether you’re also extending the repayment term. Again, with more payments comes more interest.
- While there’s no cost to originate a federal Direct Consolidation Loan, some private lenders will charge an origination fee.
- A credit check is required to consolidate private student loans via refinancing, which may be a downside, depending on your credit history.
Again, it’s important to evaluate all your options before making a decision.
Consolidation vs. refinancing
As you probably noticed, consolidating private student loans is generally done by refinancing. However, you don’t necessarily have to consolidate in order to refinance. You can cherry-pick just the loans that would save you money by refinancing, while leaving other debt (perhaps including your federal loans) as they are.
This might make more sense if you have fewer loans and just one has a very high interest rate. You can refinance to a lower rate and maintain the original benefits and rates on all your other loans.
Remember that the federal government will not refinance your loans — they only offer Direct Consolidation loans. Private lenders will refinance both federal and private student loans.
If you want to compare the immediate benefits of Direct Loan consolidation vs. private consolidation and refinancing for your situation, check out the calculator below:
Consolidation vs. Refinancing Calculator
Refinancing is the only way to lower your interest rate but you may lose some of the safeguards associated with having federal loans, so make sure you are fully educated on the decision by reading our recommended resources below:
Again, just like with consolidation, you may not want to refinance any federal loans because you’ll lose your eligibility for government-backed repayment plans. But if you don’t plan to use those programs and can financially benefit by refinancing to a lower interest rate, this may be a viable option for you.
Bottom line on federal and private student loan consolidation
While consolidating student loans may seem like an attractive option, there are many factors to consider in determining if it’s the right move for you. Make sure you ask the right questions and weigh all the pros and cons before deciding, so you can pay your student loans off as quickly and economically as possible.
Julie Evans contributed to this report.
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