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Keep reading for insight into how to consolidate student loans, what the benefits are, and alternative repayment options you may want to consider. (iStock)
If you have high-interest student loan debt or are juggling multiple payments, consolidating your student loans into just one loan (ideally with a better interest rate) may seem pretty appealing.
While consolidating student loans does have the potential to save you money if you get a better interest rate, there are also some pitfalls to watch out for. Primarily, if you refinance to consolidate federal student loans into private ones, you’ll lose valuable federal protections.
Multiple consolidation options are available. Which is right for you can depend on many factors, including whether your debt is federal student loans, private student loans, or a combination of both.
Let’s look at how to consolidate student loans, what the pros and cons are, and alternative repayment options you may want to consider.
What is student loan consolidation?
Student loan consolidation involves taking multiple student loans and combining them into one loan. This could lower your monthly payment if you consolidate into a loan with a longer repayment term. Or, it could reduce your total interest costs if you consolidate into a loan with a lower interest rate and/or shorter repayment term.
You can consolidate loans in two ways:
- Federal student loans can be consolidated into a federal Direct Consolidation loan. This gives you a single monthly payment instead of multiple payments, and allows you to retain access to federal student loan repayment plans and forgiveness programs.
- Private student loans can’t be consolidated into a Direct Consolidation Loan. Instead, you’ll need to refinance private student loans into a new loan if you want to consolidate them. Also, you can generally refinance to consolidate private student loans with federal loans.
Consolidating federal student loans
If you have federal student loans, you can consolidate your loans after you graduate, leave school, or drop below half-time enrollment. There’s no application fee, and you can consolidate most types of federal student loan, including Direct loans, both subsidized and unsubsidized. You can’t, however, consolidate Direct PLUS Loans taken out by a parent.
When you consolidate federal loans in a Direct Consolidation Loan, your interest rate is based on the average interest rate of the loans being consolidated and is a fixed interest rate. This means the interest rate on your new loan may not be significantly lower than the rates you had on your previous federal student loans.
You’ll begin repaying your Direct Consolidation Loan within 60 days after the loan is disbursed, and your loan servicer will inform you of the exact date your first payment is due. Multiple repayment plan options are available, and they can affect how long you have to pay back your Direct Consolidation Loan and what your monthly payments look like.
Pros
- Simplify loan repayment with a single loan and one monthly bill and replace variable rates with a fixed rate
- Lower monthly payments by extending repayment period
- Can gain access to additional income-driven repayment plan options and Public Service Loan Forgiveness (PSLF)
- Fixed interest rate
Cons
- Can pay more in interest if you increase your repayment period
- Outstanding interest from original loans becomes a part of your principal balance
- May lose credit for payments made toward income-driven repayment plan forgiveness or PSLF on existing loans
Who it might be good for: Borrowers with multiple federal student loans who want to simplify their monthly payments.
Refinancing to consolidate private student loans
You can refinance to consolidate private student loans (or a combination of federal and private loans) through a private lender.
When you refinance to consolidate student loans with a private lender, the lender pays off your current loans and issues you a new loan. This loan will be for the total balance you want to refinance, and you’ll get new payment terms and a new interest rate based on your income, credit score, employment history, and other financial factors.
When you refinance your private student loans, you’ll likely have options for repayment terms such as five, eight, or 10-years. Choosing the shortest term that is financially feasible can help save money on interest. You should also try to find a lender that will give you a better interest rate than you have now so you can save money on interest.
Pros
- If you have good credit you may be able to get a lower interest rate and save money
- May be able to choose a repayment period that works better for you
- Parents who helped their children pay for school by taking out loans on their behalf can transfer the debt to their child (with permission from both parties)
Cons
- No guarantees you'll get better terms than you currently have
- Applying with a cosigner is difficult
- Lose access to federal loan forgiveness programs, income-driven repayment plans, and deferment and forbearance options
Who it might be good for: Borrowers with private student loans who can get a better interest rate by consolidating.
You can compare student loan rates on Credible to see if refinancing might be right for you.
12 private student loan lenders to consider
If you’re considering refinancing your student loan debt with a private lender, take a look at these 12 private lenders, all of which are Credible partner lenders.
Advantage Education Loans
- Loan terms: 10, 15, or 20 years
- APRs: Fixed
- Eligible degrees: Undergrad and graduate
- Who it might be good for: Those who want to take over responsibility for a Parent PLUS loan
Brazos
- Loan terms: Five, seven, 10, 15, or 20 years
- APRs: Fixed and variable
- Eligible degrees: Undergrad and graduate
- Who it might be good for: Graduates with strong credit and income
Citizens Bank
- Loan terms: Five, seven, 10, 15, or 20 years
- APRs: Fixed and variable
- Eligible degrees: Undergrad and graduate
- Who it might be good for: Those who want to refinance large loan balances
College Ave
- Loan terms: Five to 20 years
- APRs: Fixed and variable Eligible degrees: Undergrad and graduate
- Who it might be good for: Those who are comfortable working with an online lender that doesn’t have branch offices
CommonBond
- Loan terms: Five, seven, 10, 15, or 20 years
- APRs: Fixed and variable Eligible degrees: Undergrad and graduate
- Who it might be good for: Parents who want to refinance Parent PLUS loans into their child’s name
ELFI
- Loan terms: Five, seven, 10, 15, or 20 years
- APRs: Fixed and variable
- Eligible degrees: Undergrad and graduate
- Who it might be good for: Parents who took out loans for their children
See these lenders’ rates and others by comparing student loans on Credible.
INvestEd
- Loan terms: Five, 10, 15, or 20 years
- APRs: Fixed and variable
- Eligible degrees: Undergrad and graduate
- Who it might be good for: Students who didn’t finish their degree
ISL Education Lending
- Loan terms: Five, seven, 10, 12, 15, or 20 years
- APRs: Fixed
- Eligible degrees: Undergrad and graduate
- Who it might be good for: Students who are still attending school
MEFA
- Loan terms: Seven, 10, or 15 years
- APRs: Fixed and variable
- Eligible degrees: Undergrad and graduate
- Who it might be good for: People refinancing debt to attend a public or nonprofit college or university
PenFed
- Loan terms: Five, eight, 12, or 15 years
- APRs: Fixed and variable
- Eligible degrees: Undergrad and graduate
- Who it might be good for: Someone refinancing student loans taken out by a parent or spouse
RISLA
- Loan terms: Five, 10, or 15 years
- APRs: Fixed
- Eligible degrees: Undergrad and graduate
- Who it might be good for: Workers who are thinking about going back to grad school
SoFi
- Loan terms: Five, seven, 10, 15, or 20 years
- APRs: Fixed and variable
- Eligible degrees: Undergrad and graduate
- Who it might be good for: Advanced degree holders in fields like law and medicine
What are the requirements for consolidating student loan debt?
To consolidate federal student loans, you must meet certain requirements.
- Only certain federal loans are eligible. While most federal loans are eligible for consolidation, there are exceptions.
- Grace period or active repayment status is key. Any loans must be in repayment or in the grace period to be eligible for consolidation.
- Loans can’t be in default. Generally, if your loan is in default, you won’t qualify. But you may still qualify if you make three consecutive monthly payments on the loan before you consolidate, or you agree to repay your new Direct Consolidation Loan under select repayment plans.
To consolidate private student loans, you’ll generally have to meet the new lender’s qualifications, which can include:
- Credit score — Having a poor credit score can limit your consolidation options and lead to less desirable terms and interest rates.
- Income — Being able to demonstrate a steady and solid income can help assure a lender that you’ll repay your new loan.
- Payment history — Having a history of making on-time payments not only boosts your credit score but affects your consolidation options.
- Cosigner — Applying for student loan consolidation with a cosigner may help you gain access to consolidation if your credit score is on the lower side.
What are the pros and cons of student loan consolidation?
There are both advantages and disadvantages to consolidating federal and private student loans that you should consider:
Pros
- Can access more favorable repayment terms
- If you get a lower interest rate, you can save money
- Paying one monthly loan payment can feel more manageable than paying multiple loans
Cons
- Consolidating federal loans into a private loan causes you to lose access to federal protections and repayment programs
- There’s no guarantee you’ll get a more advantageous interest rate or repayment term
- Extending your repayment period when consolidating can lead to spending more in interest over the years
If you want to consolidate your student loan debt, use Credible to compare rates and shop around.
When not to consolidate your student loans
Consolidating student loans can come with some major benefits, but even so, consolidating may not always be the right fit for you. You may want to reconsider consolidating your student loans if any of the following applies:
- You have federal loans but don’t qualify for a federal consolidation loan and will lose benefits and protections by consolidating into a private loan.
- Consolidating or refinancing to consolidate will give you a higher interest rate than you currently have.
- Consolidating or refinancing will lead to you having a significantly longer term that will make your loan more expensive in the long run.
- Making your new loan payments will be a struggle and your current loan is a better fit financially.
Alternative ways to manage student loan monthly payments
If you decide that consolidating your student loans isn’t right you, you may want to pursue an alternative way to manage your student loan debt.
- Deferment or forbearance — These options can help you suspend student loan payments (if you’re eligible), although interest will still accrue during this time period.
- Income-driven repayment plan — An income-driven repayment plan takes your income and family size into account when determining how much you should pay each month.
- Loan forgiveness and cancellation — Student loan forgiveness or cancellation happen when you aren’t required to make loan payments because of your job.