When to Consolidate Private and Federal Student Loans

Just like there are multiple options to choose from when taking out student loans, there are options on how to pay them off.

Private refinancing or consolidation and federal student loan consolidation are two ways to take hold of education loans in the search for an easier way to manage payments.

There are, however, key differences between these two types of student loan consolidation, and understanding these differences is important in deciding which is right for you.

On this page:

• Federal Student Loan Consolidation
• Private Student Loan Consolidation & Refinancing
• Consolidating Federal & Private Student Loans Together
• Deciding if You Should Consolidate Federal & Private Loans Together

Federal Student Loan Consolidation

There are several federal student loans that are eligible for the government’s consolidation program including, but not limited to, the following:

• FFEL Federal Stafford Loans
• FFEL PLUS Loans
• Supplemental Loans for Students
• Federal Perkins Loans
• Direct Subsidized & Unsubsidized Stafford Loans
• Direct PLUS Loans

The act of consolidating federal loans such as Direct Loans is an option offered by the government through the Federal Direct Consolidation Loan program in an effort to simplify payments.

The line of thought is simple: one payment versus many payments each month is easier. Although this logic appears sound, there are some considerations to observe before making such a decision.

By combining federal student loans, the borrower can simplify the bill each month and lower monthly payments by choosing a longer repayment period of up to 30 years. While this seems beneficial, it is actually a double-edged sword when it comes to interest.

If you lengthen the payment period, therefore lowering monthly payments, the overall interest paid on the consolidated loan actually increases. In addition, your interest rate will be a weighted average of your previous loans, so there is no way to save on interest through federal consolidation.

In addition to raised interest payments, benefits that previously applied to the multiple student loans may be lost after consolidation. Benefits such as interest rate discounts or principal rebates may be nullified for the “new” consolidated loan. The result of this is an increase in the amount spent at the end of student loan payments compared to paying off the split up student loans.

Furthermore, the act of loan consolidation is irreversible, so once the move is made, there is no going back. Applications for federal student loan consolidation can be made through the government website, StudentLoans.gov.

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Private Student Loan Consolidation & Refinancing

While federal student loans can only be consolidated with other federal student loans with the government, you can consolidate private and federal student loans into a new private student loan. This means if you refinance federal student loans they will become a new private student loan.

When you refinance student loans, you will receive a new variable or fixed interest rate and new repayment terms which may be longer or shorter than your current plan. Variable interest rates will fluctuate over the life of the loan with the market while fixed rates remain the same.

This change in interest rate and payment period carries the potential to save money for the beneficiary. In short, the borrower can benefit from a reduced interest rate, which will lead to them paying less over the life of the loan. 

Alternatively, some may choose to extend their repayment term, which lowers monthly payments but also may mean paying more over the life of the loan unless you receive a lower interest rate, in which case you may pay more or less over the life of the loan depending on the new rate and repayment term.

Understanding the Difference Between Consolidation and Refinancing

It’s important to understand how a consolidation differs from refinancing. When you consolidate your federal loans, your new interest rate will be a weighted average of all the rates on the loans being consolidated. That federal consolidation is done by the government and your loan servicer.

When refinancing and consolidating with a private lender, your new rate will be based on your creditworthiness at the time of your application and, if applicable, your cosigner’s credit history. 

If your financial situation has improved since you took out the loan, you could see a lower interest rate which will likely save you money in interest over the life of the loan. If you are not offered a lower rate than what you already have, you should avoid refinancing as you will probably end up paying more in the long term.

Consolidating Federal & Private Student Loans Together

If you have federal and private student loans that you want to consolidate, you’ll need to follow a few simple steps:

• Understand that if you consolidate federal loans with private ones, you’ll be giving up the benefits that come with those federal loan programs, such as Income-Driven Repayment plans, student loan forgiveness, and more.
• Apply with a private lender either alone or with a cosigner.
• If you’re approved, keep making payments on your old loans until you’ve been notified that they’re all paid off and you have the new loan in place.

Deciding if You Should Consolidate Federal and Private Loans Together

Before you run down to your favorite bank or credit union to apply for a consolidation loan, there are a few things you should know.

>> Read More: Should You Consolidate Your Student Loans?

Do You Need Access to Federal Repayment Programs?

Before refinancing and consolidating federal student loans with a private lender, decide if you will likely need loan forgiveness or income-driven plans in the future. If you do, then refinancing/consolidating with a private lender isn’t a good idea.

If you’re planning to apply for Public Service Loan Forgiveness after the required 120 monthly payments, you shouldn’t consolidate and refinance your loans with a private lender, since you’ll no longer be eligible. Not only will you wipe out any progress you’ve made toward your 120-payment mark, but you won’t be able to get any type of forgiveness with a privately consolidated loan.

The same goes for Income-Driven Repayment programs; if you’re currently taking advantage of those programs with your federal loans, consolidating them with private loans will put you in a new repayment plan not dependent on your income.

Do You Need Access to Federal Financial Hardship Protections?

If you don’t think you will need any financial hardship help in the future, such as deferment and forbearance options, then refinancing and consolidating with a private lender might be a good option. The federal government offers support to those with financial hardship, but many private lenders do not.

If you lose your job or find yourself unable to earn an income due to illness or injury, you can apply for forbearance, deferment, or even discharge for your federal loans in certain cases. Once you consolidate or refinance with a private lender, however, you no longer have that federal option. Some lenders offer similar protections but most of these benefits aren’t as helpful as the federal programs.

What if You Aren’t Dependent on Federal Programs?

If you are not dependent on federal repayment options and protections and do not think you will be in the future, then refinancing likely makes sense for you if you can receive a lower interest rate than what is on your current loans. 

If you are offered a lower rate, check into what benefits your new lender offers to decide if you should accept the offer. Also be sure to read some reviews of the lender to see what kind of experience other borrowers have had.

Will You Be Eligible for Private Consolidation and Refinancing?

In order to be eligible for refinancing and consolidation with a private lender, you will need to have a record of making consistent, on-time payments with your old loans, as well as a good credit score.

You’ll also need to be employed with a consistent income. Some lenders also require that your loans were taken out for an education at a Title IV-accredited school and that you have graduated – though not all do.

Key Takeaways

Think of it this way: refinancing and consolidating is like starting on a clean slate with your student loan debt. This clean slate applies to previous loan benefits as well as previous loan interest rates and payment periods.

Choosing to consolidate loans with the government may make payments easier to deal with, but it can lead to an increase in interest paid over the life of the loan. Also, keep in mind that federal consolidation will not save you money as you cannot receive a lower interest rate through it.

Private student loan refinancing and consolidation, alternatively, may save you money in interest as there is a competitive market driving interest rates. Keep in mind that those who refinance federal student loans with a private lender will lose eligibility for certain federal protections and programs, such as forgiveness programs and income-based repayment.