What to know about consolidating federal and private student loans

Consolidating federal and private student loans gives you the ability to combine multiple loans into one and could save you money in interest over time. (iStock)

If you’ve graduated with multiple student loans, you might consider combining them into one loan with a single monthly payment. Depending on the types of loans you have, there are two different ways you can do this. 

You can consolidate federal loans using a special program through the U.S. Department of Education. With private loans, you’ll need to refinance. While the two approaches are similar, it’s vital to know the difference before you turn in a loan application. This article will go over student loan consolidating and refinancing and when you might choose one over the other.

Credible makes it easy to compare student loan refinance rates from multiple lenders.

  • Student loan consolidation vs. refinancing: What’s the difference?
  • What to know about federal student loan consolidation
  • What to know about refinancing student loans
  • How to consolidate loans through refinancing

Student loan consolidation vs. refinancing: What’s the difference?

Student loan consolidation refers to combining multiple federal student loans using a Direct Consolidation Loan through the U.S. Department of Education. 

Your current federal loans are combined into a single loan with one monthly payment, and the fixed interest rate you pay is the weighted average of the interest rates on your current loans. This means you won’t save money on interest, but you may have access to different repayment plans under your new consolidation loan — including income-driven repayment or an extended repayment term. 

You’ll also keep the benefits federal loans provide, including deferment options and loan forgiveness (if you qualify for it). If these are important to you, you’ll likely want to consider consolidation rather than refinancing.

Student loan refinancing is similar. You apply for and take out a new loan from a private lender to pay off your current student loans, leaving you with a single loan with one monthly payment. 

Private loans must be refinanced rather than consolidated, but you can also choose to refinance federal student loans into your new private loan. The interest rate on your student loan refinance may be lower than the rates you’re currently paying, depending on your financial situation and market conditions. That means you could save money on your monthly payment. 

If you primarily have private student loans and qualify for a lower interest rate, you’ll likely want to consider refinancing your loans.

What to know about federal student loan consolidation

To consolidate your federal student loans, you’ll apply for a Direct Consolidation Loan through the U.S. Department of Education. You can do so online, or you can choose to print out an application and mail it in. There are no application fees or costs associated with a consolidation loan. 

You generally become eligible to consolidate your federal loans after you graduate or leave school, or become a part-time student taking less than half of a standard course load. Your current loans must be up to date on their payments, or you must have a new repayment plan in good standing or be willing to use an income-driven repayment plan. 

During your Direct Consolidation Loan application, you’ll choose a repayment plan for your new loan. This could be a standard plan with fixed payments that will satisfy your loan within 10 to 30 years. You might also choose a graduated repayment plan, with payments that start low but increase over time, or an income-driven repayment plan where you pay a fixed percentage of your discretionary income.

Pros of federal student loan consolidation

  • Single monthly payment — Consolidating your federal loans takes multiple monthly payments and due dates and combines them into a single payment that’s easier to keep track of.
  • Numerous repayment options — A federal consolidation loan offers several choices for how to repay it, including income-driven repayment options that can save you money when you’re starting your career.
  • Potential for loan forgiveness — The federal government offers loan forgiveness for teachers, public servants and for people who have paid based on an income-driven plan for 20 to 25 years. You’ll still be eligible for this with a Direct Consolidation Loan.

Cons of federal student loan consolidation

  • You might not save on interest — Because your Direct Consolidation Loan will have an interest rate that’s the weighted average of your current rates, you may not save money in interest payments.
  • Longer loan terms — Consolidating loans often means extending the period during which you pay, meaning you’ll carry your debt for a longer time and may pay more in interest over the life of the loan.
  • May reset loan forgiveness — Federal loans offer loan forgiveness after a certain period of time in some circumstances. Consolidating your loans may restart the clock on this.

If you think private student loan refinancing is right for you, you can compare prequalified rates from multiple lenders using Credible.

What to know about refinancing student loans

Refinancing your student loans involves taking out a new private student loan to pay off and replace your current loans. Many lenders offer refinancing options. 

You’ll apply for the loan, go through a credit check and get an offer for an interest rate and loan terms that you qualify for. If you accept the loan, the money goes to pay off your current loans. You’re left with a single new loan.

Pros of refinancing student loans

  • Single monthly payment — Just like consolidation, refinancing student loans offers you the chance to combine multiple due dates and payments into a single loan with one monthly payment that’s easier to keep track of.
  • May qualify for lower interest rates — Refinancing student loans leaves you with a new loan with a new interest rate. If you’ve graduated, started a career and improved your credit, you may qualify for a much lower interest rate than you received when you took out your initial loans. This will save you money in interest payments.
  • Can release cosigners — If you needed a cosigner to take out your current student loans, refinancing your loan may offer you the chance to release the cosigner and take on the loans on your own. You’ll need to have good credit and be able to qualify for the loan yourself.

Cons of refinancing student loans

  • Interest rates may be higher — The interest rate you’re offered is based on your financial situation and current market conditions. Look carefully at the interest rates you’re offered and compare them with the ones you’re currently paying. If your credit score has dropped, you may not get a better deal.
  • May lose federal benefits — You can choose to refinance private or federal student loans. However, if you choose to refinance federal student loans, you’ll lose all the benefits and protections the federal loans provide. Most private refinance loans do not offer income-based repayment, for example.
  • May lose tax deductions — Your refinance loan may not qualify for the student loan interest tax deduction, meaning you could be on the hook for a higher tax bill. If you use this deduction, make sure you’d keep it before refinancing.

How to consolidate loans through refinancing

Both federal student loan consolidation and student loan refinancing combine multiple student loans into one with a single monthly payment. In both cases, you’ll start with a loan application — either to the U.S. Department of Education or to a private lender. 

Before moving forward, take stock of your current loans, the repayment plans you’re on, the monthly payment you make and the interest rates you pay. Be especially cautious before refinancing federal student loans into a private loan. It may become clear that one method of consolidating your loans may work better for you. 

To find your prequalified rates for refinancing multiple student loans, visit Credible and compare loans from multiple lenders.

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