Understanding How Student Loan Consolidation Works

January 20, 2018 · 5 minute read

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Understanding How Student Loan Consolidation Works

If you’ve started the (somewhat arduous) journey of repaying your student loans, you’ve probably realized that keeping track of your monthly payments is a major headache. If you’re like most people with student loan debt, you’ve got multiple loans with different principal amounts, terms, and interest rates.

Some of those interest rates might be fixed, meaning they can’t change, while others might be variable, which implies the interest rate could fluctuate. On top of that, if you have more than one loan servicer, you have to log in to multiple sites to make all your payments. Try to track it all and you might end up with endless lists and spreadsheets, which doesn’t exactly make the repayment process go any faster.

Managing so many separate payments, on top of paying for housing, phone service, and a dozen other things can get real old, real quick. That’s why finding the best way to consolidate your student loans can help simplify your payments and your life.

And there are other options, like student loan refinancing, which can help simplify your life and potentially reduce your interest rate and the amount you would have paid over the life of your loan.

What is student loan consolidation?

Basically another type of debt consolidation, student loan consolidation is when an outside party buys your student loans and has you pay them back directly. The consolidation essentially combines your various student loans into one payment plan with a single interest rate and regular payment schedule.

The amount you borrow for the new loan covers the principal balance on all of the student loans you consolidated. You’ll have a new interest rate as well, but exactly what that is depends on the lender might depend on your credit score, and other factors as well. You’ll have just one bill to pay to one lender, as opposed to making multiple payments each month.

Why would you consolidate student loans?

Typically, consolidating your student loans gives you a single loan at a fixed interest rate that is guaranteed throughout the life of your loan. However, some private lenders offer variable rate consolidation, which means the interest rate can fluctuate.

If you have multiple loans from different loan servicers or loans with variable interest rates, consolidation could dramatically simplify your repayment plan. You’re eligible to consolidate your loans once you graduate or leave school, or if you are enrolled in school less than part-time.

Consolidation also gives you the opportunity to change the duration of your student loan. You may start off with a 10-year payment plan, but when you consolidate you might choose to change the life of your loan. You can shorten the life of the loan, such that you pay it off even sooner, or extend the life of your loan, which can be helpful for reducing monthly payments in the short term.

What is the best way to consolidate student loans?

The well-known student loan consolidation option the U.S. Department of Education offers is the Direct Consolidation Loan for borrowers with federal student loans. You can apply online or mail your application in, 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 if you’re currently in the process of paying your federal student loans.

When you choose to consolidate student loans with a Direct Consolidation Loan, you may choose a new repayment plan that extends the life of the new loan up to 30 years. You can also choose between fixed monthly payments, graduated payments that increase over time, and pay-as-you-earn programs. Some Direct Consolidation Loan repayment plans even offer loan forgiveness after 20 or 25 years.

Possible Drawbacks of Student Loan Consolidation

While loan consolidation can potentially give you a lower monthly payment, you will end up paying more in interest over the life of the loan if you extend your 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 loans with a private lender could be a better option. While you may lose some benefits of a federal loan, you could get a more competitive interest rate, thereby lowering how much you pay over the life of the loan.

Most importantly, if you work in a public service field, as a teacher or social worker, for instance, loan consolidation will cancel out some benefits you can get through the Public Service Loan Forgiveness program .

The Public Service Loan Forgiveness program makes it possible to forgive the balance of Direct Loans after 120 qualifying payments. If you consolidate Direct Loans, your new consolidated loan no longer qualifies for this program.

Can you consolidate student loans when you have private loans?

Under the federal consolidation plan, you can only consolidate federal student loans. No private student loans can be consolidated into a Direct Consolidation Loan. If you have private loans, the best way to consolidate those student loans is to refinance. The perk of refinancing is that you can wrap your private and federal loans into one loan.

Essentially, a lender gives you a personal loan (which is used to pay off your private and federal student loan balances), and then you just have to pay back that one personal loan. Not only can this combine multiple student loans into one single debt, but also you may qualify for a much lower interest rate depending on many factors, including your credit score. Refinancing at a lower interest rate may save you thousands of dollars over the life of your loan.

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 your student loans could get you a lower interest rate. And unlike the federal loan consolidation program, you can refinance both your federal and private student loans when you refinance.

One important thing consolidation and refinancing have in common is that you’ll lose some of the borrower-friendly benefits your original student loans came with, like rebates or conditional loan cancellation. So if you have a student loan in a special career category—a Nursing Student Loan, for example—or your loan is part of a public service-based forgiveness program, it might be best to steer clear of consolidation or refinance plans. Be sure you review any and all of the special features of your loans before committing to any changes.

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


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.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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