Reasons to Consolidate Federal and Private Student Loans

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Before You Read, Lower Your Student Payment

It’s that quick & easy — really. Our free tool checks a network of top refinance lenders and shows you options in one easy chart.

Checking rates takes 2 minutes with no impact on your credit
Federal & private loans are eligible
No maximum loan amount

If you would like to consolidate federal and private student loans, the process 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.

Federal Student Loan Consolidation vs Private Student Loan Consolidation

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

The Direct Consolidation Loan is the only federal student loan consolidation program offered by the government. 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. This means that you could wind up paying a little bit more in interest with a Direct Consolidation Loan.

For instance, if your current loans had a weighted interest rate of 5.010%, and you consolidated them through the federal program, your new interest rate would be 5.125%. That’s a 0.115% difference, which is not insignificant.

Additionally, if you do decide to extend your repayment term with a Direct Consolidation Loan, this will result in a lower monthly payment — but at a cost. By extending your repayment term, you will wind up paying even more in total interest over the life of the loan.

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

Refinancing Federal and Private Student Loans

Another way to consolidate your federal loans — and the only way to consolidate private loans — is by refinancing your federal student loans through a private lender. If you have both, you can even refinance federal and private student loans together.

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.

Can you change private student loans into federal ones?

Federal loans come with attractive benefits that may have you wondering if you can change private student loans into federal ones. Unfortunately, it’s not currently possible to do so. If you took out a loan to pay for college with a private lender, it is unable to be transferred to the federal government.

Furthermore, if you originally had a federal student loan but refinanced it with a private lender, that loan is no longer eligible for federal student loan repayment options like income based repayment or federal student loan relief programs. This is why it is very important to weigh the pros and cons of refinancing before deciding to do so. Once a federal loan is refinanced, you cannot refinance a private student loan back into a federal one.

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.

If you’re wondering if you should consolidate your federal student loans, 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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