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Student Loans Student Loan Repayment

Should I Consolidate My Student Loans?

Updated Apr 06, 2023   |   7-min read

If you have student loans, you may have both federal student loans and private student loans, and each of your loans may have a different servicer or lender who you’re responsible for making payments to.

Juggling multiple loans from different sources can be a big pain, but you don’t have to do it forever. You can look into consolidating your loans into one big loan. You can do this either with a Direct Consolidation Loan for eligible loans or with a refinance loan from a private lender.

There are pros and cons to both federal consolidation loans and private refinance loans, so you should carefully consider whether either is right for you before taking action to try to deal with your debt. This guide will help answer your questions.

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What Is Student Loan Consolidation?

In the simplest terms, student loan consolidation simply refers to the process of consolidating many loans into one new loan. Often, this new single loan will have a different interest rate or structure, but that depends on what type of consolidation you do.

That’s because a Direct Consolidation Loan consolidates your debt in a very different manner than a refinance loan which is often also called private student loan consolidation.

Federal Loan Consolidation vs. Private Loan Consolidation

Federal Consolidation

A Federal Direct Consolidation Loan is available only from the Department of Education. You can only consolidate eligible federal loans such as Direct Loans, and your new interest rate will be a weighted average of your previous loans.

You’ll repay all existing eligible federal loans with your new Direct Consolidation Loan, and the fixed interest rate will be equal to a weighted average of the loans you consolidated.

You can’t include any private student loans in your Direct Consolidation Loan, though, so you may still end up owing loan payments to multiple servicers if you have private loans.

Private Consolidation

Student loan refinancing, also called private student loan consolidation, allows you to combine multiple federal and private student loans into one new private loan. Like with a Direct Consolidation Loan, you’ll have one new loan to pay instead of several.

This can simplify your student loan repayment even further, but if you pay off federal student loans with a new private refinance loan, you must know that you’re giving up important protections and federal repayment options.

There will be no more opportunity for Public Service Loan Forgiveness or income-driven repayment plans, and if you need to pause payments on your loans, your options for forbearance or deferment will depend entirely on the lender you’ve chosen.

However, unlike a Direct Consolidation Loan, a private consolidation loan does allow you to change your interest rate. Typically, it only makes sense to refinance if you are eligible for a lower interest rate which will require you to have a good credit score and repayment history.

When to Consolidate Student Loans

Taking out a Direct Consolidation Loan with the federal government or refinancing your student loans can have a big impact on the repayment process.

You’ll need to understand the effect of consolidating or refinancing so you can make the right choice about whether consolidating student loans actually makes sense in your situation.

Should I Consolidate My Federal Student Loans?

Taking out a Direct Consolidation Loan makes sense if you want to change the way you’re paying back federal student loans. A Direct Consolidation Loan allows you to change your loan servicer if you aren’t happy with the company that is currently managing your student loans.

You can also change to a longer repayment plan if you’re having trouble keeping up with your monthly payments—in some cases for as long as 30 years.

And you can take certain types of federal loans—including some PLUS Loans—that aren’t normally eligible for Public Service Loan Forgiveness or income-driven payment plans and make those loans eligible for these programs through Direct Consolidation.

What if I have private loans

If you want to consolidate your private loans, too, or if you are hoping to reduce your interest rate, Direct Consolidation isn’t the right approach for you. You should instead consider private student loan consolidation.

You also need to be aware that a Direct Consolidation Loan will start the clock over if you were working towards Public Service Loan Forgiveness or loan forgiveness at the end of an income-driven plan.

In other words, if you already had 100 payments in towards the 120 payments you’re required to make for Public Service Loan Forgiveness, you’d be starting back at 0 payments if you consolidated.

Should I Consolidate My Private Student Loans?

If you have private and federal loans you want to consolidate together or a bunch of private loans you’re hoping to consolidate, you can consider a refinance loan from a private lender.

If you want to change your rates

Refinance loans have much more variation in rates and terms. In fact, there’s even variation in whether you have a fixed or variable interest rate.

While all federal loans come with a fixed rate, some private loans offer the option for variable rates, which tend to start lower and increase over time, along with the financial index they’re tied to.

In many cases, you can reduce the interest you are currently paying on your loans when refinancing, either with a new fixed or variable rate loan. You can also change the repayment term, giving yourself more or less time to pay back the loan compared with your existing debt.

Changing the interest rate and repayment timeline will impact both your monthly payment and the total interest paid.

Be wary of increasing your repayment timeline

Just be aware that while reducing your rate should lower your overall repayment cost, stretching out your payment timeline will reduce your monthly payments but may mean paying more in total interest over time since you’re paying interest for longer.

While reducing your interest rate and payment may sound good, you do give up federal borrower protections if you refinance federal loans.

And there’s no guarantee you’ll be approved for a refinance loan at all—much less one with a lower rate—as refinance lenders consider your credit score, income, and other financial factors when deciding whether you can borrow.

>> Read more: Should I Refinance My Student Loans?

Other Things to Keep in Mind

Consolidating loans through refinancing or a Direct Consolidation Loan can have an impact on your credit score. That’s because you’ll have a new account on your credit report, which shortens your average age of credit.

You’ll also have inquiries on your report if your credit is checked when you apply for a new loan—and too many inquiries can hurt your credit score. The good news is, making on-time payments to your new loan can help you boost your score again.

You’ll need to make sure you shop around carefully and explore all your options before deciding if you should consolidate and who you should consolidate with. Not all lenders have the same qualifying requirements, and loan terms can vary, so finding the best lender can take time.

Consolidating Student Loans Could Simplify Your Life

If you’re struggling with student debt, you’re not alone—it’s one of the most common types of debt in the United States. But consolidating and refinancing could potentially help make repayment easier.

If you’re uncomfortable with your current loan situation, consider the possibilities for changing to a new one.

Your new loan could have better terms and could make repayment much easier—as long as you’re careful about who you refinance or consolidate with and make sure your new loan terms are good ones.