How student loan consolidation works
February 8, 2024 7 min read
Consolidating combines multiple loans into a single payment. Read on to learn how it works and how to determine whether it makes sense for your financial situation.
- Student loan consolidation is a process that combines multiple loans into one new loan with a single monthly payment.
- Only federal student loans are eligible for the federal consolidation program. Private lenders may offer their own consolidation or refinancing options.
- Some potential benefits of consolidating include simplifying and lowering the monthly payment.
- Some potential downsides of consolidating include extending the repayment term and losing access to federal loan benefits.
What is student loan consolidation?
Student loan consolidation is a process that combines multiple student loans into one new loan to help reduce the number of payments you have to make each month. It might also give you a chance to lower your monthly payment or interest rate.
But there might be drawbacks. According to the Department of Education, you could lose some benefits. You could also end up increasing the total amount you owe or extending the time it takes to pay off everything.
Federal student loan consolidation
You can consolidate one or more federal loans into a Direct Consolidation Loan. This could help you lower the number of loan payments you have to make each month and reduce your monthly payment by extending your loan term. It can even help you qualify for certain repayment or forgiveness plans.
Private student loan refinancing
If you have private student loans or a mix of federal and private loans, you can’t consolidate them through a federal program. But you might be able to combine them through a private lender or bank by refinancing your loans.
Private student loan refinancing might not offer interest rates as low as a federal program would. But your rate for a new private consolidated loan may still be lower than your previous loan rates if your credit scores have improved.
Keep in mind that if you’re consolidating federal and private student loans by refinancing with a private lender, you could lose access to any benefits of the federal loans, like federal repayment plans and deferment programs.
3 steps to consolidate federal student loans
Here are some steps you may want to take when consolidating federal student loans:
1. Check whether you qualify
Some of the requirements for federal student loan consolidation include:
- Your loans must currently be in repayment.
- Your loans must not have been previously consolidated.
- If your loan is in default, you’ll typically need to have made a certain number of payments in a row or be enrolled in an eligible repayment plan.
- You must have graduated, left school or fallen below half-time enrollment.
2. Apply for a Direct Consolidation Loan
You can apply for federal loan consolidation directly through the Federal Student Aid website. You’ll need to complete the federal Direct Consolidation Loan application and sign a promissory note. The promissory note is a legal document of your agreement to repay the lender.
3. Use your loan to pay off existing student loans
If you’re approved for a Direct Consolidation Loan, you can use it to pay off your original loans. Each month, you can make one payment instead of several with a fixed interest rate until the loan is paid off. You can expect to start repayment of your Direct Consolidation Loan 60 days after it has been paid out.
3 Steps to consolidate private student loans
Here are some steps you may want to take when consolidating your loans through a private lender:
1. Find a private lender
It’s possible that your current lender may offer a student loan refinancing option. If so, you could choose to consolidate with the same lender or shop around for another.
2. Check whether you qualify
Some of the requirements for private student loan consolidation could include:
- You’re making payments on private student loans.
- You have good-to-excellent credit scores.
- You can provide proof of income.
If you meet the criteria, you can complete and submit an application.
3. Use your loan to pay off existing student loans
If you’re approved, you can use your new loan to pay off your existing loans. Then you can begin making one consolidated monthly payment on the new loan.
The pros and cons of student loan consolidation
Whether student loan consolidation is right for you depends on your situation. Here are some of the potential benefits and downsides of consolidating or refinancing loans:
- A single loan can simplify the loan repayment process with just one monthly bill.
- You could lock in a lower monthly payment by extending your repayment term.
- Federal loan consolidation may qualify you for several repayment plans or Public Service Loan Forgiveness.
If you’re consolidating private student loans, you might be able to lower your interest rate, which could help you pay off your loans faster.
- You can only consolidate federal student loans into a federal Direct Consolidation Loan.
- If you’re consolidating federal and private student loans, you could lose access to any benefits of the federal loans, like lower interest rates and federal repayment plans and deferment programs.
- Consolidating your loans could extend your repayment term.
- When consolidating, the unpaid interest on your original loans is rolled into your new principal balance. This may cost you more over the life of the loan.
- You can only consolidate your federal student loans once.
- Federal student loan consolidation won’t lower your interest rate.
Should you consolidate your student loans?
The decision about whether to consolidate your student loans is personal. Here are some things you can consider:
- Is student loan forgiveness important to you? Some federal student loans that aren’t eligible for Public Service Loan Forgiveness can become eligible if you consolidate them into a Direct Consolidation Loan. But if you’re already eligible, check what impact consolidating could have on your progress toward forgiveness. You may experience a delay or lose eligibility altogether.
- Would it help you to switch things up? Consolidating might help you streamline or reduce payments, give you more time or even change your loan servicer.
Should you refinance your private student loans?
If you have private student loans or a mix of federal and private loans, should you consider refinancing instead? Here are some things to think about:
- Would it save or cost you money? Refinancing your student loans may help you lower your monthly payments or your interest rate. But there may also be fees.
- How are your credit scores? If your credit scores have increased since you took out your student loans, refinancing may help you get a lower interest rate. But if your scores have dropped over time, you may end up with a higher interest rate than you currently have.
FAQ about consolidating student loans
Here are some answers to a few of the most common questions about consolidating student loans:
How long does it take to consolidate student loans?
If your application is accepted, the process to receive your loan could take about 30 to 45 days.
How much will I pay to consolidate my student loans?
There’s no fee associated with a federal Direct Consolidation Loan. If you’re refinancing private student loans, check with the lender about potential fees.
Will consolidating my student loans affect my credit?
Federal student loan consolidation doesn’t require a hard inquiry, so the application won’t affect your credit.
Applying to consolidate your student loans through a private lender will trigger a hard inquiry, like any application for credit would. It will show up on your credit report and could cause a dip in your credit scores, though probably not a large one.
Experts advise against applying for too much credit in a short time period. Doing so could result in multiple hard inquiries on your credit reports and could negatively affect your credit scores.
And remember, in the long term, the effect of the loan consolidation on your credit depends on your responsible use of your new loan.
What is the average interest rate on consolidated student loans?
Typically, the interest rate is determined by calculating the weighted average interest rate of all the loans being consolidated. That number is then rounded up to the nearest one-eighth of a percentage. This could mean that your new interest rate ends up lower than your current one. It will also be fixed over the lifetime of the loan.
How to consolidate student loans in a nutshell
Consolidating your student loans can be an effective way to better manage your monthly loan payments and possibly lower your interest rate or monthly payment. But it may not be right for everyone. It’s a good idea to take some time to consider the pros and cons and look into other strategies for paying off student loans before you make a decision.