How to Consolidate Student Loans

Student loan consolidation can help solve this issue by combining two or more student loans into one new loan. The process for consolidating your student loans will depend on what type of loans you have.

Find out how to consolidate student loans — including when to consider consolidating federal and private student loans together.

If you have multiple federal loans, the Direct Consolidation Loan Program lets you combine your loans into a new federal Direct Consolidation loan.

Here are the steps to consolidate your federal loans.

1. Apply online. Use the studentloans.gov website to complete the Direct Consolidation Loan application.
2. Select which federal loans you want included. You’ll need to indicate which loans you want to consolidate and uncheck any loans that you don’t want to consolidate.
3. Choose a new loan servicer. Loan consolidation gives you a chance to switch loan servicers. If your current loan servicer is doing a lousy job, now’s your chance to pick a new one. Keep in mind that FedLoan Servicing is your only option, if you’re pursuing Public Service Loan Forgiveness (PSLF). FedLoan handles all PSLF borrowers, so your loans will eventually get transferred there anyway once you submit your PSLF employment certification form.
4. Pick a repayment plan. You’ll need to choose a repayment plan based on your goals for repayment. A standard 10-year repayment plan is the fastest route to paying your loans in full. Whereas, an income-driven repayment (IDR) plan reduces your monthly payment and extends your repayment period to 20 to 25 years. If you want to work toward PSLF, you need to choose an IDR plan to make qualifying payments.
5. Provide your personal information and sign the dotted line. Fill out the remaining employer and contact information. Then, all that’s left is to review your details, certify the information, and sign the application.

Keep in mind that you won’t be able to include any of your private student loans in the process. If you’re interested in consolidating both your federal and private loans together, you’ll need to explore student loan refinancing with a private lender — learn more about this later.

The downside of federal consolidation

Debt consolidation isn’t the right answer for everyone. Here are some of the common drawbacks of consolidating your federal student loans.

• You’ll lose existing forgiveness credits. If you’ve already made progress toward PSLF or other loan forgiveness plans, consolidation will reset your qualifying payment counter to zero.
• You may lose other borrower benefits. For example, you may lose interest rate discounts or principal rebates associated with your current loans.
• Outstanding interest is added to the principal balance of your new loan. This may result in higher interest costs.

It’s also important to note that your new interest rate with a Direct Consolidation Loan will be the weighted average of all your loans being consolidated. If your goal is to find a lower interest rate, you may be better off refinancing your loans instead.

To consolidate your private student loans, you’ll need to refinance your loans with a private lender.

And the real test for whether you should refinance is: Will it give you a lower interest rate?

Shop around for the best interest rate and loan terms with at least three different lenders. In addition to the interest rate, you should also ask yourself:

• Does the lender charge origination fees or prepayment penalties?
• Are there flexible repayment terms that match your financial situation?
• Does the lender offer deferment and forbearance options?
• Does the lender offer a cosigner release? If so, how many payments are required before you can apply for it?

If a lender offers you a lower interest rate than your current loans, go for it.

Continue exploring lenders and interest rates at least once a year to make sure you’re paying the lowest private student loan rates possible. You can refinance your private student loans as many times as you want. You may even be able to take advantage of refinancing bonus offers, which can earn you significant cashback just for refinancing your loans.

The moment you consolidate (or refinance) your federal student loans with your private loans, you’ll lose access to certain federal benefits and protections. These include benefits, like flexible income-driven repayment plans and loan forgiveness programs.

The only time you should consider consolidating both your federal and private loans together is if you plan to pay your debt in full. This means you have no intention of pursuing loan forgiveness and have zero worries about job security that would cause a significant drop in income.

Pros vs. cons

By combining all of your student loans, the advantage is only dealing with one payment per month and one loan servicer. Eliminating the paperwork headache that comes with juggling multiple loans is certainly a benefit for some borrowers.

Additionally, you may end up with lower interest costs overall. That’s the goal, at least.

But you’ll also forgo federal protections, like options for deferment or forbearance. This includes the option to choose an income-driven repayment plan. These benefits can come in handy if you lose your job or return to school for an advanced degree.

Should I consolidate my federal and private loans?

To help decide if you should move forward with combining your federal and private loans together, consider these two questions:

1. When you divide your federal student debt by your annual income, is the ratio below 1.5?
2. Are your private student loan interest rates above 4%?

If you can answer yes to both questions, then you may benefit from refinancing your federal and private loans into one new private loan.

If you’re working toward any of the federal forgiveness programs, you shouldn’t consolidate or refinance your federal loans. You’ll lose any progress you’ve made toward forgiveness and may lose many of the protections or perks that come with your existing federal loans.

And if you have private loans, look into refinancing your loans at least annually. The lower you can get your interest rate, the more interest costs you’ll shave off for the life of your loan.

But if your goal is to pay off your loans in full as fast as you can, refinancing your private and federal loans can cut your interest rate and help you reach financial freedom faster.