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Reasons to Consolidate Federal and Private Student Loans

Ben Luthi
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The process of consolidating student loans can vary depending on whether you’re consolidating through the federal government or with a private lender.

Understanding how each process works and both the advantages and disadvantages of each can potentially help you know when to consolidate student loans to simplify your debt management.

How to consolidate federal student loans vs. how to consolidate private student loans

You can consolidate federal student loans in one of two ways: through the Direct Loan Consolidation program or with a private lender through student loan refinancing.

With private student loans, however, your only option for consolidation is to refinance your debt together with another private lender.

Here’s what you need to know about both options.

Direct Loan Consolidation

If you consolidate through the U.S. Department of Education, you can replace one or more existing federal student loans with one new one. You’ll get the choice to retain your current servicer or pick another.

The potential benefits of using a Direct Consolidation Loan include:

  • Simplified bills and payments: If you have student loans with multiple loan servicers, consolidating them into one loan with one servicer can help simplify your financial situation and make it easier to stay on top of monthly payments.
  • Access to certain federal student loan programs: If you have certain types of federal loans, you may not be eligible for some loan forgiveness programs or income-driven repayment plans. However, if you consolidate, it could open up some repayment options you didn’t have before.
  • Get out of default: If your federal loans are currently in default, consolidating them with a different lender could help you get out of that status.

You don’t have to undergo a credit check to consolidate your federal loans with this program. However, your new interest rate will be the weighted-average rate from all of the loans you’re consolidating rounded up to the nearest one-eighth of a percent. And, there isn’t a way to qualify for a lower rate even with an outstanding credit history.

Because you’ll end up paying more interest on a Direct Consolidation Loan, consider it only if the benefits you’re gaining are worth the extra cost.

Student loan refinancing

Another way to consolidate your federal loans — and the only way to consolidate private loans — is through a private student loan refinancing lender.

The process is largely the same: You replace one or more existing loans with a new one. The difference is that your new lender will be a private company instead of a federal loan servicer.

Depending on your situation, refinancing could allow you to take advantage of several additional benefits including:

  • Lower interest rates: Private lenders may be able to give you a lower interest rate than what you’re currently paying on your existing loans. If you’re eligible, you could save money on interest and free up some cash flow with a lower monthly payment.
  • Payment flexibility: Private lenders typically offer repayment terms ranging from five to 20 years. If you’re hoping to pay off your student loans faster and can afford a higher monthly payment, requesting a shorter term could help you achieve your goals while paying much less in total interest. On the flip side, if you need a lower monthly payment and breathing room in your budget, you could extend your repayment term to get it.
  • Choice of lender: The refinancing process allows you to shop around and compare interest rates, terms, and other features across multiple lenders. You can take your time to pick the right lender based on your needs.

Although these benefits can be very helpful, not everyone qualifies for student loan refinancing. You generally need a solid credit history and a relatively high income to get approved. However, you can also apply with a co-signer if your financial and credit situation is less than perfect.

Also, if you refinance federal student loans with a private lender, you’ll lose access to federal benefits including loan forgiveness programs, income-driven repayment plans, and more.

As a result, it’s important to run the numbers on potential savings and other benefits before deciding to move forward.

Should I consolidate student loans?

Consolidating student loans can help you in a number of ways, but it’s not the right fit for everyone.

As you consider whether you should consolidate, think about what you want to do with your student loans, and how federal or private consolidation could help. Then weigh the immediate benefits and drawbacks with the long-term ones to ensure that you won’t end up regretting your decision down the road.

Next, consider walking down the path a little with each option to get some more hard numbers.

For example, the process for how to consolidate federal student loans involves logging into your Federal Student Aid account and fill out an application. During the process, you’ll be able to view different repayment options and see how much your new monthly payment would be.

The process of how to consolidate private student loans or federal loans with a private lender will have to shop around and get prequalified with different lenders. During this process, you’ll be able to view and compare rate quotes, along with repayment terms and other features.

Shopping around can be time-consuming, so consider using  Purefy’s Compare Rates tool to speed up the process. You’ll provide similar information that you would with each individual lender, but Purefy allows you to compare multiple options all at once in one place.

Just keep in mind that you shouldn’t officially submit an application for either option until you’re ready to proceed. But going through the process to get an idea of the actual terms can help inform your decision.

You’ll also want to consider what you’re potentially giving up with consolidation. For example, if you’re working toward the Public Service Loan Forgiveness program, consolidating would reset the clock on your monthly payment requirement, and refinancing with a private lender would disqualify you altogether.

The bottom line

Consolidating your student loans can help you achieve your student loan pay off goals. Depending on your situation, though, one kind of consolidation may be better than the other.

Because every situation is different, it’s essential to take some time to research all your options to find the best solution for you.

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