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 one bill to pay to one lender, as opposed to making multiple payments to different lenders each month.
What Is Student Loan Consolidation?
So what does it mean to consolidate student loans exactly? Consolidation involves combining multiple student loans into one loan, but there are different options depending on whether you consolidate with the federal government or with a private lender.
Federal student loans can be consolidated through the Direct Loan Program. Direct Loan consolidation allows borrowers to combine different federal loans into a single 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 both 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. When you refinance a federal loan with a private company through refinancing, however, you lose access to federal benefits and protections.
Here’s what to know about student loan consolidation.
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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. These are some of the reasons you might consider a Direct Loan consolidation:
To Simplify Your Repayment Plan
If you have multiple federal student loans from different loan servicers, consolidation can 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.
To Qualify for Loan Forgiveness
Consolidation can give you access to federal loan programs you may not be eligible for if you have other types of federal loans as opposed to Direct Loans. These programs can include additional income-driven repayment plans and Public Service Loan Forgiveness (PSLF).
To Secure a Fixed Interest Rate
A Direct Consolidation Loan typically gives you a single loan at a fixed interest rate that’s guaranteed throughout the life of your loan. As mentioned earlier, the new rate is a weighted average of your previous federal loans.
To Lower Your Monthly Payment
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 lengthen the life of your loan. Keep in mind if you lengthen your loan term, you may have lower monthly payments, but you’ll pay more interest over the life of the loan.
Consolidating isn’t the only way for federal student loan borrowers to change their repayment plan, however. 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.
Recommended: Guide To Private Student Loans
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.
If you’re wondering, “Can I consolidate my federal loans?” the answer is likely yes if you have federal loans. 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, lowering how much interest owed over the life of the loan. (If, however, you’re refinancing with an extended term, you may pay more interest over the life of the loan.)
However, if you work in a public service field, as a teacher or social worker, for example, student loan refinancing will cause you to lose access to federal student loan repayment benefits you can get through the Public Service Loan Forgiveness 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, you can consolidate those student loans through refinancing. Both federal and private student loans can be refinanced into one new loan.
When you refinance, a private lender gives you a new loan (which is used to pay off your private and federal student loan balances), and then you have to pay back that one loan.
In addition to combining multiple student loans into a single loan, you may also 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 set to expire at the end of August 2023 , 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.
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.
Student loan 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. If you’re considering refinancing your student loans, SoFi offers flexible terms, competitive rates, and no fees.
Is consolidating student loans worth it?
While it may not save you money, consolidating federal student loans with a Direct Consolidation Loan can make repayments simpler, since you will only have one payment. You can also secure a fixed interest rate or change your repayment term, and you may become eligible for Public Service Loan Forgiveness or additional income-driven repayment plans. Student loan refinancing with a private lender may save you money if you qualify for a lower interest rate or you change to a shorter repayment term, but you will lose access to federal loan benefits and protections if you refinance a federal student loan with a private lender.
How long does it take for a student loan consolidation to go through?
The length of time it takes for a student loan consolidation to go through varies by lender and whether you are planning to consolidate federal loans with the government or refinance with a private lender. As a general ballpark, federal loan consolidation can take up to two to three months. Refinancing with a private lender may only take a few weeks.
What are the advantages of student loan consolidation?
There are different advantages of student loan consolidation, depending on whether you consolidate federal student loans or refinance with a private lender. As mentioned earlier, a federal Direct Consolidation Loan can simplify payments, give you a fixed interest rate, and help you qualify for certain federal programs. You can also lower payments if you lengthen your repayment term, but you will end up paying more interest over time. Refinancing federal or private loans with a private lender can save you money if you qualify for a lower interest rate or shorten your repayment term, but you’ll lose access to federal benefits and protections.
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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