Should I Consolidate My Student Loans?

Consolidation and refinancing can both help you accomplish a similar goal: Simplifying your monthly student loan payments. But the intent behind each action differs, and the better option could depend on the types of student loans you have. For example, consolidation is generally better for federal student loans, while borrowers with private student loans could benefit more from refinancing. 

If you’re wondering about consolidating vs. refinancing your student loans, here’s what you need to know about each option, when it makes sense, and how your loans might change moving forward. 

Should I consolidate my federal student loans?

When you consolidate your federal student loans, you essentially combine multiple loans into a single fixed-rate loan. This results in one monthly payment, which can be easier to manage than several. Student loan consolidation could also reduce your monthly payments because it may extend your term. Just keep in mind that a longer term means you’ll pay more interest over time.   

Borrowers can consolidate eligible federal student loans with a Direct Consolidation Loan through the U.S. Department of Education (DoE). When you consolidate, your new interest rate will be the weighted average rate of all your federal loans, rounded up to the nearest ⅛ percent. 

One important caveat: You can’t consolidate federal and private student loans through the DoE. If you have both types and want a single payment, you must refinance with a private lender instead. We’ll discuss refinancing below. 

Here’s when consolidation could make sense versus when it might not. 

Scenario	Should you consolidate?
Your priority is to simplify monthly payments	Yes
You want to pay less	Maybe
You have qualifying payments toward Public Service Loan Forgiveness (PSLF)	No
You have older loans or Parent PLUS loans and want to qualify for PSLF	Yes

Should I consolidate federal student loans to simplify monthly payments?

If your main goal is streamlining multiple federal loan payments into a single payment, consolidation can help you achieve that. 

But don’t focus solely on this goal before moving forward. Consider other factors as well, such as the types of federal loans you borrowed and your total loan costs over time. Looking at the full picture can help you determine whether consolidation is the best approach. 

Should I consolidate to reduce my payments?

Consolidation could help you reduce your monthly payments, but it’s also important to account for loan benefits and long-term costs. When you consolidate with a Direct Consolidation Loan, you might sacrifice certain benefits. For example, if you have an older Federal Family Education Loan (FFEL) Program loan with an interest rate reduction benefit, you could end up with a higher rate after consolidation. 

Long-term interest costs are another factor. Remember that you may end up with a slightly higher rate or longer repayment term with a Direct Consolidation Loan, which could result in higher interest costs over time.  

Should I consolidate my student loans for PSLF?

Generally, it doesn’t make sense to consolidate your student loans if you’ve made several qualifying payments toward PSLF because you’ll lose credit for those qualifying payments if you get a new Direct Consolidation Loan.

But if you have older loans, such as FFEL or Perkins loans, or Parent PLUS loans that aren’t eligible for PSLF, taking out a Direct Consolidation Loan could make sense. FFEL, Perkins, and Parent PLUS loans don’t qualify for PSLF, but consolidating them can make them eligible.

Read More

Pros and Cons of Consolidating Student Loans

When should I refinance my federal student loans into private ones? 

As we mentioned, the DoE doesn’t let you consolidate federal and private student loans with a Direct Consolidation Loan; you must refinance with a private lender if this is your goal. Before going this route, be aware that you’ll sacrifice certain federal loan benefits, such as the potential for student loan forgiveness through PSLF or income-driven repayment (IDR), after refinancing federal student loans with a private lender.

Scenario	Should you refinance?
You qualify for a lower rate	Yes
Your loans are eligible for PSLF or IDR forgiveness	No

Should I refinance my federal student loans for a lower rate?

Many federal student loans have competitive rates, but a private student lender might offer a lower rate—especially if you have an excellent credit score and a high income. At the time of writing (October 2024), some private lenders have rates below 5% for qualifying borrowers. 

If refinancing your federal loans with a private lender would result in much lower payments and total interest costs, it could be a smart move. But proceed with caution, and consider your federal student loan benefits before moving forward.

To decide if refinancing federal loans makes sense for you, start by comparing three different lenders’ interest rates and terms. Use a refinancing calculator to compare the costs to determine what fits your budget and lines up with their long term financial goals. If you reasonably anticipate entering into the job market immediately, and expect steady income and a stable career path, refinancing from federal to private loans (or a combination of both) would make sense if the interest rates and terms are more favorable. However, if you’re unsure of your career path, it would be wise, even if you can get a lower rate with a private lender, to maintain the federal loans to remain eligible for the benefits available to those experiencing a financial hardship.

Erin Kinkade, CFP®

Should I refinance my federal student loans if they’re eligible for PSLF or IDR forgiveness? 

Generally, it doesn’t make sense to refinance your federal student loans to private student loans if they’re eligible for PSLF or IDR forgiveness. This is especially true if you’ve made several qualifying payments toward loan forgiveness already. You’ll lose out on potential student loan forgiveness when you refinance federal loans with a private lender. 

Should I consolidate my private student loans?

Remember that you can’t consolidate private student loans through the DoE, but you can refinance them with a private lender. Here’s when doing so could make sense

Scenario	Should you refinance?
You want to simplify your private student loan payments	Yes
You qualify a lower interest rate	Yes
You want a different repayment term	Yes

Should I consolidate private student loans to simplify monthly payments?

Refinancing multiple private student loans into a single loan is an excellent way to simplify your monthly payments. Once the refinance is complete and your old loans are paid off, you’ll have one monthly payment instead of several. Just ensure you consider other factors, such as your interest rates and lender fees, before moving forward with a refinance. 

Should I consolidate my private student loans for a lower rate?

If you can qualify for a lower rate by refinancing your private student loans, doing so could make sense. But you’ll likely need excellent credit, low levels of debt overall, and a steady income to qualify for the lowest rates. Borrowers with a thin credit file and significant debt may want to wait until their financial situation improves before refinancing. 

Should I consolidate private student loans for a different term?

Refinancing your private loans can help you alter your current loan term if you want to reduce your monthly payments or accelerate your repayment schedule. Be aware that a longer term will mean lower monthly payments but higher long-term interest costs. A shorter term may increase your monthly payments, but you could save significantly on interest costs over time. 

When should I consolidate student loans? 

There’s not necessarily an ideal time to consolidate your federal student loans. You can do so anytime after you drop below half-time enrollment, graduate, or leave college. If you think consolidation is your best option, you can complete a Direct Consolidation Loan Application on the Federal Student Aid Office’s website. 

If you’re planning to refinance your student loans with a private lender, it could make sense to do so once you’ve built strong credit. Private lenders consider your creditworthiness when determining your loan rates, and the best rates are often reserved for borrowers with excellent credit. Just remember to weigh the pros and cons before refinancing any federal student loans with a private lender. 

If the interest rate and terms to refinance are not better than the current loans, I don’t recommend refinancing. Instead focus on potentially consolidating for simplicity, but only if it provides an economic benefit.

Erin Kinkade, CFP®

FAQ 

Can my student loans be forgiven if I consolidate?

If you consolidate your federal student loans into a Direct Consolidation Loan, you can maintain or extend your eligibility for forgiveness programs, such as PSLF, even for certain loans that weren’t previously eligible. 

However, consolidating will reset the forgiveness timeline, so any payments made before consolidation won’t count toward forgiveness.

Will my interest rate go up if I consolidate my student loans?

When you consolidate federal student loans, your new interest rate will be a weighted average of the interest rates on your current loans, rounded up to the nearest ⅛ percent. 

Your interest rate won’t decrease, but it typically won’t increase much either. Private student loan consolidation or refinancing could result in a higher rate if your credit isn’t strong.

Does federal student loan consolidation hurt your credit?

Federal student loan consolidation generally doesn’t hurt your credit because the process doesn’t involve a hard credit inquiry. Consolidating multiple loans into one can simplify your payments and help you avoid missed or late payments, which can help your credit over time.

What credit score is needed to consolidate student loans?

For federal student loan consolidation, no credit score is required; the process doesn’t involve a credit check. However, if you’re looking to refinance your student loans with a private lender, you’ll need a good credit score—typically in the mid-600s or higher—for competitive rates.

Can you be denied federal student loan consolidation?

Yes, you can be denied federal student loan consolidation if your loans are in default and you haven’t made satisfactory repayment arrangements or if you’ve already consolidated those loans before (with some exceptions, such as adding new loans to a Direct Consolidation Loan).