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Understanding How Student Loan Consolidation Works

March 30, 2021 · 4 minute read

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Understanding How Student Loan Consolidation Works

Student loan consolidation works similarly to other types of debt consolidation. Borrowers can combine multiple student loans into one new loan with new terms and a new interest rate.

The amount you borrow for the new loan covers the principal balance on all of the student loans you consolidated. You’ll have just one bill to pay to one lender, as opposed to making multiple payments to different lenders each month.Two types of student loan consolidation include Direct Consolidation loans and student loan refinancing.

Federal student loans can be consolidated through the Direct Loan program. This allows borrowers to combine different federal loans into a single, consolidated, loan. The new interest rate is a weighted average of all your federal loan rates, rounded to the nearest eighth of a percent.

Student loan refinancing is an option available for private and federal loans. Refinancing also allows borrowers to streamline their repayment with a single lender and qualifying borrowers could secure a more competitive interest rate. However, federal loans are eliminated from federal benefits and protections when they are refinanced.

Read on for more information on student loan consolidation.

Why Would You Consolidate Federal Student Loans?

Borrowers with federal student loans generally have the option to consolidate their federal loans through the Direct Consolidation Loan program. Typically, consolidating your student loans through this program gives you a single loan at a fixed interest rate that is guaranteed throughout the life of your loan.

If you have multiple federal student loans from different loan servicers, consolidation could simplify your student loan repayment plan. Borrowers are eligible to consolidate their federal student loans once they graduate or leave school, or if they are enrolled in school less than part-time.

Consolidation also allows borrowers to change the duration of their student loan. For example, you may start off with a 10-year payment plan, but when you consolidate you might choose to change the life of your loan. Consolidating isn’t the only way for federal student loan borrowers to change the repayment plans they are enrolled in. Borrowers with federal student loans are able to adjust the repayment terms on their loans, at any time without incurring a fee.

Private student loans are not eligible for consolidation through the Direct Consolidation Loan program, but private lenders do offer student loan refinancing. Refinancing can allow borrowers to consolidate their debt by combining all of their loans into a single loan.

How Do You Consolidate Federal Student Loans?

Federal student loan borrowers interested in consolidating their federal loans into a Direct Consolidation loan can apply online or by mail, and there are no fees for applying.

There are a few cases where borrowers are ineligible, but for the most part, this option is available to those who are currently in the process of repaying their federal student loans.

When choosing to consolidate student loans with a Direct Consolidation Loan, borrowers may choose a new repayment plan that extends the life of the new loan up to 30 years.

Borrowers can typically select any of the federal repayment plans, which include a standard repayment plan with fixed monthly payments, a Graduated plan with graduated payments that increase over time, and income-driven repayment plans. Direct Consolidation Loans are still eligible for federal loan forgiveness programs such as Public Service Loan Forgiveness.

Possible Drawbacks of Student Loan Consolidation

While federal student loan consolidation can potentially give you a lower monthly payment, borrowers could end up paying more in interest over the life of the loan if they extend their repayment timeline. In some cases, lower monthly payments now can mean an extra year or two of repayment later.

If you want a lower monthly payment without making extra payments, refinancing your student loans with a private lender could be an option to consider.

While refinancing with a private lender means you lose all the benefits and protections offered for federal student loans, qualifying borrowers could secure a more competitive interest rate, thereby lowering how much interest owed over the life of the loan.

Most importantly, if you work in a public service field, as a teacher or social worker, for instance, student loan refinancing will also cancel out some federal student loan repayment benefits you can get through the Public Service Loan Forgiveness (PSLF) program.

Can You Consolidate Student Loans When You Have Private Loans?

With federal student loan consolidation, you can only consolidate federal student loans. No private student loans can be consolidated into a Direct Consolidation Loan.

If you have private student loans, one way to consolidate those student loans is to refinance. Both federal and private student loans can be refinanced into one new loan.

Essentially, with refinancing, a private lender gives you a new loan (which is used to pay off your private and federal student loan balances), and then you just have to pay back that one loan.

Not only can this combine multiple student loans into one single loan, but also you may qualify for a lower interest rate depending on many personal financial factors, including your credit score. Refinancing at a lower interest rate may reduce the money you spend in interest over the life of your loan.

Recommended: How Do Student Loans Affect Your Credit Score?

What Is The Difference Between Consolidating And Refinancing Student Loans?

Programs like the federal Direct Consolidation Loan do exactly what they say: consolidate all of your federal student loans into one loan.

But you might not actually save on interest payments, because the new loan is a weighted average of your old interest rates, slightly rounded up. So your average interest rate will likely be slightly higher than what you paid before.

In contrast, refinancing student loans with a private lender could result in a lower interest rate for qualifying borrowers. And unlike the federal loan consolidation program, it is possible to refinance both federal and private student loans.

When you refinance with a private lender, you’ll lose the borrower-friendly benefits that federal student loans have, like income-driven repayment plans, or deferment, forbearance, and loan forgiveness programs. These borrower protections include the emergency relief measures enacted as a result of the COVID-19 pandemic. These protections, currently sent to expire at the end of September 2021 , have temporarily set interest rates on all federal loans at 0% and paused payments on federal loans.

Be sure you review any and all of the special features of your loans before committing to any changes.

The Takeaway

Student loan consolidation allows borrowers to combine their existing student loans into a new loan. For federal loans, this can be done through the Direct Consolidation loan program. Refinancing is a similar process, where a borrower pays off their existing student loans and borrows a new loan with a private lender. The interest rate on this new loan is determined by the lender based on factors like the borrower’s credit score and history.

Refinancing to a lower interest rate could help borrowers spend less money in interest over the life of their loan.

Considering refinancing your student loans? Learn more about student loan refinancing and see why it may be a smart option for you.



IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF SEPTEMBER DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF SEPTEMBER DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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