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How to Consolidate Student Loans
By Jessica Walrack MONEY RESEARCH COLLECTIVE
Are you juggling multiple student loan payments each month? A consolidation loan may be able to help by combining them into a single payment. However, there are a few drawbacks to consider before signing on the dotted line. Learn all about how to consolidate student loans and when it’s a good idea.
Reminder: President Biden’s administration has recently extended the Covid-19 forbearance period, pausing federal student loan repayments through August 31st, 2022. If you’re considering consolidating or refinancing your federal student loans, you may want to wait until the forbearance period ends. See the U.S. Department of Education website for more details.
What is loan consolidation?
Loan consolidation refers to replacing two or more of a borrower’s existing loans with a new larger loan and a single monthly payment. For example, say you have three $10,000 loans, each with a $100 monthly payment. If you get a $30,000 consolidation loan and use it to pay off the three loans, you’d be left with a single monthly payment of $300.
When it comes to student loans, the government offers a consolidation program for federal loans. Additionally, many private lenders offer student loan refinancing for both federal and private loans. While similar, there are a few notable differences between the two.
Federal student loan consolidation
The federal government’s Direct Consolidation Loan program allows you to select multiple federal student loans (not private loans) and pay them off using a larger loan with a fixed interest rate. The rate you get will be the weighted average of the interest rates from the loans you consolidate.
Private student loan refinancing
Private lenders offer student loan refinancing, which is also referred to as consolidation by some. Going this route, you can use a new loan to pay off one or more student loans (federal and/or private). The interest rate, however, won’t be based on your previous rates. It will depend on the lender’s APR range, its assessment of your creditworthiness, and the loan amount.
How to consolidate federal student loans
If you want to consolidate multiple federal student loans into a federal Direct Consolidation Loan, follow these steps.
1. Access the application: Visit the Federal Student Aid website (studentaid.gov) to access the online Direct Consolidation Loan application. Log into your account.
2. Choose the loans to consolidate: Select the loans you want to consolidate from the list and review your new loan.
3. Select a grace period. If you have a loan that’s currently in a grace period, you can request that the servicer delay the application until the grace period is over.
4. Choose a servicer: Choose a federal loan servicer from the list. If you’re consolidating for Public Service Loan Forgiveness (PSLF), choose the designated servicer.
5. Choose a repayment plan: Review the available payment plans and choose the best fit for you.
6. Review terms and conditions: Read and agree to the terms and conditions.
7. Provide personal information: Enter your personal information (your name, address, employer, etc.).
8. Review and sign: Review all of the application information, sign your name, and click “Continue.”
That’s it! Once you submit your application, you’ll receive a confirmation email from the Federal Student Aid office that tells you the next steps. But what if you want to refinance your federal loans using a private lender? You can often visit a lender’s website to apply. In most cases, you’ll be able to find out if you’re prequalified within a few minutes.
Benefits of consolidating federal student loans
The Direct Consolidation Loan program comes with many benefits. It can:
- Streamline your federal student loan payments.
- Get rid of variable interest rates.
- Lower your monthly payments by extending your loan term.
- Give you access to the Public Service Loan Forgiveness (PSLF) program and additional income-driven repayment options (if the loans you consolidate aren’t Direct Loans).
On the other hand, if you decide to refinance your federal student loans with a private lender, you can potentially get a lower interest rate and/or a different repayment term.
Downsides to consolidating federal student loans
There are also a few downsides to the Direct Consolidation Loan program, including:
- If you increase your loan term, you’ll likely pay more over the life of the loan.
- You can lose perks and protections such as principal rebates, interest rate discounts, and loan cancellation benefits.
- If you’re on an income-contingent repayment plan working towards forgiveness, consolidation will cause you to lose your credit toward forgiveness.
Additionally, if you refinance federal loans with a private lender, you’ll lose the federal aid benefits such as income-based repayment plans, loan forgiveness programs, interest-free deferment periods, and various payment relief options. Further, eligibility for a private loan will depend on your credit score which can make them harder to get.
How to consolidate private student loans
As we mentioned above, if you have private student loans, you won’t be able to consolidate them through the federal Direct Loan Consolidation program. However, you can apply to refinance them with a private lender, whether it’s your existing lender or a new one. To do so, you can often visit the lender’s website and go through their application process. In most cases, this will involve providing information about your identity, personal finances, loan balances, employment, and credit.
Benefits of consolidating private student loans
The main potential benefit of refinancing or consolidating your private student loan debts into a single loan with another private lender is the possibility of getting a lower interest rate and/or lower monthly payments. Now that interest rates are rising, student loan borrowers with variable rate loans may want to refinance with a fixed rate loan. Further, if you’re refinancing more than one loan, you might also appreciate not having to juggle multiple payments on different dates to multiple lenders.
Downsides to consolidating private student loans
The main downside is that you’ll need good credit, or a cosigner with good credit, to qualify and get the best rates. Without that, you may not qualify for a private loan or could get rates that are too high to save you money.
When to consolidate student loans
When should you consider refinancing or consolidating your student loans?
When you have multiple federal student loans
If you have multiple federal student loans and find that the payments are a hassle, a Direct Consolidation Loan could streamline them into one easy payment. It also gives you the option to adjust your term and lower your monthly payment amount.
When you have multiple private student loans
Similarly, if you have multiple private student loans, student loan refinancing can help you avoid making multiple monthly payments. Check with a few lenders to see if they can reduce your costs. However, be sure to calculate the average interest rate on all the loans you want to consolidate and ensure your new rate will beat it.
When you have good-to-excellent credit
While qualifying for the Direct Loan Consolidation program doesn’t involve a credit check, refinancing through a private lender does. If you have good-to-excellent credit – and if your current loans were taken out at a time when interest rates were high – a private lender may offer you a competitive rate that can help you save a significant amount of money over the life of your loan.
When you have a stable job
You’ll want to wait to refinance student loans with a private lender until you have a stable job. Why? Most private lenders require you to earn a certain amount of income each year to qualify. Doing so also ensures that you can make the payments as agreed throughout your term.
When not to consolidate student loans
When should you think twice about consolidating or refinancing your student loans?
When you’re on income-driven repayment plans
Income-driven repayment plans are often very flexible and hard to beat. Not only do you get an affordable monthly payment, but your balance is forgiven after a certain number of years. If you consolidate or refinance a loan with an income-driven repayment plan, you’ll lose the credit you’ve earned toward forgiveness. Plus, it can be hard to find a lower-cost payment plan overall.
When you’re on a forgiveness plan
If you have a federal loan and are on track to qualify for loan forgiveness, it may be the most affordable path to paying off your outstanding balance. Be sure to compare the costs of both options carefully before opting for consolidation or refinancing as both are irreversible
When you’re on deferment or forbearance
If you refinance or consolidate your student loans while they’re on deferment or forbearance, you’ll likely need to start making payments to your new lender. If you’re not ready yet, you should wait until the deferment or forbearance period ends.
What to watch out for
The federal government offers a wide range of programs to help borrowers afford their federal student loan payments. As a result, it recommends exhausting all your other options before refinancing federal debt with a private lender.
Also, beware of the common scam where private companies charge an upfront fee to consolidate your federal student loans. You can complete the federal consolidation for free following the steps above. Further, reputable private student loan lenders won’t charge an upfront fee. If you aren’t sure where to find one, we’ve identified some of the best student loan lenders on the market for you.
Bottom line on student loan consolidation
Student loan refinance or consolidation can be very helpful. You may be able to stop juggling a variety of monthly loan payments or even cut your overall costs. However, whether it’s the best move for you or not will depend on your total loan balance, your new interest rate and the details of your situation. Be sure to review your options carefully — consider the interest rates, repayment plans, forbearance or deference options, forgiveness programs, and any other features that will impact your overall costs. Then you’ll have the information you need to decide if the benefits outweigh the costs.
