Student Loan Consolidation

If you have multiple student loans, repayment may be difficult. Numerous monthly payments can make it difficult to remember due dates and even harder to manage the financial burden on your budget.

However, you may be able to find some relief through student loan consolidation. When you consolidate student loans, you secure a single monthly payment and potentially some savings depending on the type of consolidation you pursue.

In this guide:

• Student Loan Consolidation Comparison: Private vs. Federal
• Private Student Loan Consolidation
• Federal Student Loan Consolidation
• Which Consolidation Option is Best for You?
• Student Loan Consolidation Resources

Student Loan Consolidation Comparison: Private vs. Federal

When considering the best way to consolidate student loans, many borrowers are confused with the two options: federal student loan consolidation and private student loan consolidation (also commonly referred to as student loan refinancing). 

Though often considered different approaches, both have a similar outcome: one loan is used to pay off existing loans, resulting in a single monthly payment. However, there are important differences between the two, and understanding them is the key to selecting the right approach to making your loans more manageable—and potentially more affordable.

Private Student Loan Consolidation

If you’re considering refinancing and consolidating your student loans with a private lender, here are a few things you should know.

Private Student Loan Consolidation Lenders

One of the primary reasons that borrowers may choose to consolidate through a private lender is to make their loans more affordable. This typically means finding a lender that offers low interest rates.

Keep in mind that there are two types of rates: fixed and variable. Variable rates are often lower to start, but they can fluctuate over the life of the loan, meaning you may end up paying far more than you expected, depending on the market. Fixed rates are typically a bit higher than advertised variable rates, but they are secured for the life of the loan, meaning you know exactly how much your loan will cost.

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How it Works

When you decide to refinance your student loans, your existing loans are paid off with a new one. Once this happens, your loan obligations with the original student loan servicer end for these loans.

If you refinance federal student loans, they will now also be private student loans.

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

Eligibility Requirements

Because there are many private lenders that offer student loan consolidation, eligibility requirements will vary from lender to lender. With that being said, there are a few things to keep in mind.

Credit Score

Private lenders consider a variety of factors when determining eligibility. One of the biggest factors will be your credit score. Borrowers with higher credit scores are more likely to be approved, as well as receive better rates.

If you do have poor credit, you may not be completely out of luck. Many private lenders allow borrowers to include a cosigner on their loan application. A cosigner can lead to higher approval odds and lower rates. This is a serious responsibility, so it is important to consider the implications that action will have on the cosigner.

Loan Status

Typically, you won’t be able to refinance a loan, federal or private, if it’s in default status. Lenders want to see a track record of on-time payments to ensure that you are likely to repay your loan. 

Income 

In addition to your credit score, lenders also consider your income when they determine eligibility. Though there may not be set income requirements, many private lenders expect you to be able to show some effort at securing steady pay. They will also likely consider your income in relation to your existing debt, also known as your debt-to-income (DTI) ratio. If your DTI ratio is too high, you will have problems securing a loan.

Loan Amount 

Finally, the total loan amount will also come into consideration. Many lenders will only refinance loans that meet certain minimums. For example, many will not consider a loan for less than $10,000.

It’s important to know how much you owe on each loan. This way you can make sure the amount you plan on consolidating meets the needed minimums or maximums set forth by the lender.

How to Consolidate Student Loans with a Private Lender

1) Gather Important Documents

If you’re considering consolidating your student loans with a private lender, your first step should be to gather all the pertinent information. This includes the balance of each loan, as well as the existing interest rates. This is particularly important since consolidating with a private lender often only makes sense if the interest rate is lower than what is currently on your loans.

2) Review Lenders and Rates

Once you’ve gathered all the information, your next step should be reviewing your options. There are numerous companies and organizations that provide private student loan consolidation products, and each offers different rates, repayment options, and benefits.

>> Read More: Compare Student Loan Refinance Lenders

Fortunately, you can typically receive prequalified quotes by filling out a short online application that doesn’t affect your credit score. However, some lenders will run hard inquiries, which can have a negative impact on your credit.

Always be sure to review policies related to any quotes, specifically what type of credit inquiry will be used. If the information is not readily available, your best bet is to call the lender to inquire further.

3) Choose a Lender and Apply

The last step is to choose the best student loan consolidation option and submit a full application to that lender. While each lender’s application is different, they typically only take a few minutes and require basic information.

Federal Student Loan Consolidation

If you have more than one federal student loan, you may be able to take advantage of the Direct Consolidation Loan program. If so, here are a few things to know.

How it Works

Much like private student loan consolidation, federal student loan consolidation through a Direct Consolidation Loan will result in the replacement of numerous loans with a single loan with a single payment.

However, unlike private student loan consolidation, the federal government has a set equation that’s used to determine your interest rate, which will be the weighted average of all interest rates plus a small percentage. In this case, you won’t save money.

However, federal student loan consolidation is not without merits. In addition to securing a single monthly payment (making your federal student loan repayment easier), federal loan consolidation can make you eligible for income-driven repayment plans or student loan forgiveness programs that you may not have been eligible for prior.

Eligibility Requirements

Most federal student loans are eligible for consolidation. These include: 

• Federal Stafford Loans (Subsidized, Unsubsidized, and Nonsubsidized)
• Federal Perkins Loans
• Nursing Student Loans
• Direct Loans (Subsidized, Unsubsidized, and PLUS)
• Health Education Assistance Loans
• Other types of federal loans (See the Federal Student Aid website for a full list)

To be eligible for a Direct Consolidation Loan, all loans must be in repayment status or in their grace period. Loans in default are not eligible for consolidation until you make “satisfactory repayment arrangements.” According to the Department of Education, this means that you make three consecutive monthly payments or you agree to enter into one of the income-driven repayment plans, like Income-Based Repayment (IBR) or Pay As You Earn (PAYE).

How to Consolidate Student Loans with the Government

To consolidate your federal education loans with the government, you’ll need to apply for a Direct Consolidation Loan. This can be done through  StudentLoans.gov. The application can be completed online, or you can download, print, and submit the application via mail.

In addition to personal and financial information, to successfully complete the application, you will need a verified Federal Student Aid (FSA) ID as well as a list of the specific loans you do and do not wish to consolidate under the Direct Consolidation Loan. All loan information should be available by logging into your loan servicer’s website. You can also find a list of all federal loans you have by logging into the National Student Loan Data System.

Repayment After You Consolidate Federal Student Loans

At the time of application, you will be required to select a repayment plan. Due to this, applicants are advised to review all available options before completing the application.

Repayment options typically include the standard repayment plan, which is a fixed number of payments for 10 years; a graduated repayment plan, which increases over time; and numerous income-driven repayment plans, all of which will change your required minimum payment based on your income. 

A list of federal student repayment plans is also available on the Federal Student Aid website.

Keep in mind that extending your repayment terms or choosing plans that allow for lower payments will result in an increase in interest accrued over the life of the loan, making it more expensive. However, it’s best to select a loan plan that you can confidently stick to, as failure to make payments can lead to a series of negative consequences including defaulting on your loans, loss of federal loan benefits, increased fees, and lower credit scores.

Which Consolidation Option is Best for You?

Though both consolidation options can help you take control of your loans, it’s important that you pick the best student loan consolidation path for your current circumstance.

When to Consolidate Your Student Loans With a Private Lender

Private student loan consolidation is a valid option if you have private student loans or both private and federal student loans that you want to combine. By combining numerous private loans, you can potentially lower your interest rates, monthly payments, and the overall cost of the loan.

Is it right for you? That depends if you meet the following:

You Are Eligible for a Lower Interest Rate

Since refinancing is completed in the private student loan sector, your credit history, as well as your income, will play a significant role in determining the rates and terms for which you’re eligible. If you have good credit and a steady income, private student loan consolidation can certainly prove to be a valuable tool. If that’s not the case, you may have a hard time securing an interest rate that makes the move worthwhile.

You Are Willing to Give Up Federal Benefits

Furthermore, if you are considering consolidating your federal student loans through a private lender, it’s important to realize that you’ll lose benefits and protections that are currently only offered to federal borrowers. This is particularly true of income-driven repayment plans, which limit your payments based on your income, as well as other benefits like Public Service Loan Forgiveness and deferment options.

For that reason, if you are currently taking advantage of those programs or there is a strong possibility that you may need to rely on one of them in the future, you may want to reconsider.

When to Consolidate Your Student Loans Through the Government

Federal student loan consolidation only applies to federal student loans. If you have private student loans, you cannot consolidate them through the federal government.

Consolidating student loans through the government makes sense if you meet the following:

You Want to Keep Federal Benefits

If you do have federal student loans, you may want to consider the Direct Consolidation Loan program. This option is best for federal borrowers who want to maintain the benefits associated with federal loans but still simplify their repayment by securing a single monthly payment. 

You Want to be Eligible for Income-Driven Repayment

If you currently have Parent PLUS Loans, loans from the FFEL Program, or Perkins Loans, consolidating through the Direct Consolidation Loan program can also make you eligible for income-driven repayment plans which you would not be previously eligible for.

You Are Not Eligible for Private Consolidation

Since federal student loan consolidation is not dependent on factors like your credit score or job history, it could be a good option for borrowers who were unable to consolidate those loans with a private lender but still want to simplify repayment.

You Are Not Looking to Save on Your Loans

Unfortunately, when consolidating your federal student loans with the government, you will not see any savings since your new interest rate will be the weighted average of all existing rates, plus a fraction of a percentage more. You may even choose a longer repayment plan which will likely cost you more in interest over time.

Student Loan Consolidation Resources

Here are some additional student loan consolidation resources that may help you:

• When to Combine Federal and Private Student Loans Through Consolidation
• Student Loan Refinancing vs. Consolidation
• Student Loan Rehabilitation vs. Consolidation
• Should I Consolidate My Student Loans?
• Avoiding Student Loan Consolidation Scams
• How to Decide if You Should Consolidate Your Student Loans
• Should Married Couples Consolidate Student Loans?