In 2023, more than 43 million Americans collectively have over $1.76 trillion in student loan debt. If you are one of the millions with some form of student debt, you may have considered student loan consolidation, which allows you to combine all of your student loans into one loan with one monthly payment.
Simplifying the student loan repayment process might seem like a good idea, but there are a few things to consider before you consolidate your loans. In some cases, consolidating your loans may disqualify you from certain federal student loan repayment programs and forgiveness. But other times, consolidation can allow you to lower your interest rates or shorten the amount of time it takes you to pay off your loan.
Ahead, we review how student loan consolidation works and the pros and cons of the process.
Student Loan Consolidation Explained
Student loan consolidation is designed to combine some or all of your student loans and make repayment more manageable. There are both federal and private options when it comes to consolidating your student loans.
Private Student Loan Consolidation
Private student loan consolidation is when a lender pays off all or some of your student loan debt and creates a new loan, which you will then make payments on. This process is also known as student loan refinancing. If you consolidate or refinance through a private lender, the new loan will ideally have a lower interest rate and better terms than your previous student loans.
With a private lender, you can consolidate both federal and private loans. But if you refinance your federal loans with a private lender you will you lose access to federal student loan forgiveness programs, such as income-driven repayment plans. If you plan on using one of these programs now or at some point in the future, it’s best to hold off on consolidating federal loans through a private lender.
Federal Student Loan Consolidation
If you are hoping to consolidate federal loans only and want to keep access to federal forgiveness programs, you can consolidate with a Direct Consolidation Loan through the U.S. Department of Education.
Recommended: Types of Federal Student Loans
Consolidating through the federal student loan system doesn’t usually save you money; it simply combines multiple loans into one. Your new interest rate is a weighted average of all your loans’ interest rates, rounded up to the nearest eighth of a percentage point. Any unpaid interest on the loans you’re consolidating will be capitalized — that is, added to the principal of the new loan. There are no application fees for Direct Consolidation Loans, and the loans remain federal loans.
Consolidation may be particularly useful for borrowers who are pursuing federal student loan forgiveness or who are enrolled in one of the more flexible federal student loan repayment plans, such as an income-driven repayment plan.
You can also choose to just refinance your private loans and not consolidate both private and federal into a new private loan. If you go this route, you may be able to get the benefits of refinancing (lower interest rates, better terms) without losing the perks of having federal loans.
Before you consolidate or refinance your loans, you should consider the pros and cons of the process. Getting clarity on whether consolidation is right for you will help you make the right decision for your financial needs.
💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.
Benefits of Consolidating Student Loans
There are a few reasons to consider student loan consolidation either with a Direct Consolidation Loan or refinancing through a private lender.
Whether you choose a Direct Consolidation Loan or choose to refinance through a private lender, your loan repayment may be simplified. Managing multiple student loan payments may increase your chances of missing a payment. If you miss even one payment, you may risk damaging your credit score. Late payments may also stay on your credit profile for up to seven years.
Consolidating multiple loans into one may help eliminate some of the stress of juggling multiple loan payments and may make repayment more manageable.
Fixed Interest Rate
When you refinance your loans through a private lender, your interest rate and terms will be based on your credit score, payment history, type of loan you’re seeking, and other financial factors. While requirements may vary by lender, applicants who meet or exceed the lender’s criteria may qualify for better interest rates and terms, thus saving money over the life of the loan. Borrowers can also switch from a variable to a fixed interest rate when refinancing through a private lender.
With federal Direct Loan Consolidation, as mentioned earlier, a borrower’s interest rate is a weighted average of current loan rates rounded up to the nearest one-eighth of a percentage point, which means this doesn’t typically result in savings for the borrower. The borrower does, however, keep their access to federal loan forgiveness programs.
Flexible Loan Terms
Student loan consolidation may allow you to change the duration of your loan. If you currently have a 10-year repayment plan, for example, when you consolidate or refinance, you may choose to shorten or lengthen the term of your loan. Typically, lengthening the term of your loan will reduce your monthly student loan payment but add up to more total interest in the long run.
Drawbacks of Student Loan Consolidation
Even though there are benefits of student loan consolidation, there are also drawbacks. Here are a few considerations to be aware of before consolidating student loans.
You Can’t Lower Interest Rates on Federal Student Loans When Consolidating
If you choose the Direct Consolidation Loan, generally you won’t see any savings. Because your new interest rate is a weighted average of your current loans rounded up to the nearest one-eighth of a percentage point, you will probably pay around the same amount you would have paid if you didn’t consolidate. Further, any unpaid interest on the loan you’re consolidating will be capitalized — that is added to the loan principal.
If you extend your term, you may see your monthly payment decrease, but your total interest payments will increase.
On the other hand, if borrowers choose to refinance with a private lender, they may qualify for a lower interest rate, thus saving money over the term of the loan. They could also opt for lower monthly payments by extending their loan term. But as mentioned above, you may pay more interest over the life of the loan if you refinance with an extended term.
Possible Disqualification from Federal Repayment Programs
Refinancing federal student loans with a private lender disqualifies you from federal repayment programs, including the Public Service Loan Forgiveness Program (PSLF) and income-driven repayment plans.
Borrowers will also be disqualified from federal benefits such as forbearance and deferment options, which allow qualifying borrowers to pause payments in the event of financial hardship.
Some private lenders may have hardship programs in place, but policies are determined by individual lenders.
Private Lenders May Charge Refinancing Fees
While there is no application fee for the federal Direct Consolidation Loan, private lenders may charge a fee to refinance loans. Fees associated with refinancing student loans are determined by the lender.
💡 Quick Tip: Refinancing could be a great choice for working graduates who have higher-interest graduate PLUS loans, Direct Unsubsidized Loans, and/or private loans.
Refinancing vs Consolidation
Consolidating or refinancing student loans are terms that are thrown around interchangeably, but they actually apply to two different types of loans. A federal student loan consolidation is when you combine federal loans through a Direct Consolidation Loan. This is done by the U.S. Department of Education only. A student loan refinance, on the other hand, allows you to combine private and/or federal loans into one new loan and is done by a private lender; while this does effectively “consolidate” your loans, it’s different in some key ways from federal student loan consolidation. Below are some differences and similarities between refinancing and consolidating student loans.
Student Loan Refinancing vs Consolidation
|Combines multiple loans into one||Combines multiple loans into one|
|Can refinance federal and private loans||Can consolidate federal loans only|
|Private refinance lenders may charge a fee||No fees charged|
|Credit check required||No credit check needed|
|Interest rate could be lowered||Interest rate is a weighted average of prior loan rates, rounded up to nearest one-eighth of a percent|
|Term can be lengthened or shortened||Term can be lengthened or shortened|
|Will no longer qualify for federal forgiveness or repayment programs||Remain eligible for federal forgiveness and repayment programs|
|Saves money if interest rate is lowered||Typically not a money-saving option|
Understanding the benefits and drawbacks of student loan consolidation — as well as the difference between federal student loan consolidation and private refinancing — can help you make an informed decision about repaying student loans.
If you decide to consolidate your loans via private student loan consolidation, you might want to consider evaluating a few options from different lenders, because requirements — as well as interest rates and loan terms — can vary from lender to lender.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
Can your student loans still be forgiven if you consolidate them?
Possibly. If you consolidate your federal student loans with a Direct Loan Consolidation, you are still eligible for federal loan forgiveness programs. However, if you choose to consolidate your loans through a private lender, which is also known as refinancing, you will no longer be eligible for forgiveness programs and other federal student loan benefits.
When is consolidating student loans worth it?
Consolidating student loans is worth it if you’re looking to combine multiple student loan payments into one, or you’re looking to lower your interest rate. You can use a Direct Consolidation Loan for your federal loans and keep your access to federal benefits like income-based repayment programs or forgiveness. Another option is to refinance through a private lender, which may give you a lower interest rate and lower monthly payment, but you do lose access to federal loan benefits like forgiveness and income-driven repayment plans.
What are some advantages of consolidating student loans?
The biggest advantage of consolidating your student loans is that you combine them into one loan so you only have one payment every month. This makes it easier to track your loans. If you choose to refinance your loans with a private lender, you may also receive a lower interest rate, which can help you save money. But if you refinance federal loans with a private lender, you lose access to federal programs like forgiveness and forbearance. While people use the terms “consolidation” and “refinance” interchangeably, they are not the same thing.
SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.
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