Because student loan eligibility is based on academic terms, college students apply for multiple loans throughout their time in school. The end result is that most college graduates have eight separate student loans when they leave school to start their careers.
If your loans are with the same servicer or lender, you may be able to set up one monthly payment for all of them. But that may not always be the case, and it can get even more complicated if you have loans from multiple sources — including federal and private student loans.
If you’re wondering if you should consolidate your student loans, here’s what you need to know about the process, the benefits and drawbacks, and how to determine if it’s right for you.
The benefits of consolidating student loan debt
Every situation is different, so the benefits you can gain from consolidating student loans can vary. Also, those benefits can depend on the type of consolidation you choose.
For example, if you’re wondering how to consolidate federal student loans, your options include a Direct Consolidation Loan with the federal government or a student loan refinance with a private company.
If learning how to consolidate private student loans is more relevant to your financial goals, your only option is a private student loan refinance.
Here are the pros and cons of each option.
How to consolidate federal student loans: Pros and cons
The Direct Loan Consolidation program allows you to replace one or more federal student loans with a new loan via a federal loan servicer. You can apply through your Federal Student Aid account, and there’s no credit check required.
Here are some of the potential benefits of a Direct Consolidation Loan — some of which can make a huge difference as you work on paying down your student debt:
- Easier payments: Replacing multiple monthly payments with just one can simplify your life and make it easier to focus on your repayment strategy.
- Retain benefits: If you have federal student loans, consolidating them with another federal servicer will allow you to maintain certain benefits, such as loan forgiveness programs and income-driven repayment plans. In fact, depending on the type of loans you have, consolidating could help you qualify for benefits you’re not currently receiving.
- Choice of servicer: If you’re having trouble with your current federal loan servicer, consolidating makes it possible to choose another one.
- Escape default: If your federal loans are in default, consolidating them resets the clock, so to speak, which can help prevent further damage to your credit report from missed payments.
Although these perks can be valuable as you pay off your student loans, there are also some potential pitfalls to keep in mind:
- Slightly Higher interest rate: When you get a Direct Consolidation Loan, your new interest rate will be the weighted-average rate from your previous loans, which is then rounded up to the nearest one-eighth of a percent. While that’s not a huge increase, it could mean more interest over a long period of time and there’s no opportunity to qualify for a lower rate — even if you have stellar credit.
- Can impact forgiveness progress: If you’re working toward Public Service Loan Forgiveness, you need to make a minimum number of payments to qualify. If you consolidate your eligible loans, that clock will reset.
Note that you also have the option to consolidate federal loans with a private lender through student loan refinancing — which can come with additional benefits. More on that below.
How to consolidate private student loans: Pros and cons
If your student loans are with a private lender, you won’t be able to consolidate them through the federal program.
Instead, you can consolidate your loans with another private lender with a student loan refinance. Although every private lender is different with unique features and offers, there are some consistent benefits that student loan borrowers can take advantage of through refinancing:
- Potential for lower interest rate: Whether you have federal or private loans, you may be able to score a lower interest rate through refinancing. Even a small rate decrease could spell big savings over time. It can also reduce your monthly payment.
- Control over monthly payments: You can choose a shorter or longer repayment term than what you currently have, giving you some flexibility with your monthly payments. A shorter repayment term will save you money on interest and help you become debt-free more quickly, while a longer repayment term could give you some payment relief each month.
- Choice of lender: As with federal loan consolidation, refinancing allows you to choose which lender you work with. If you’ve had a poor experience in the past, you can pick a more reputable lender with better support.
The primary benefits of refinancing are the potential savings and payment flexibility. However, there are some potential disadvantages to keep in mind as well:
- No guarantee: Because your refinancing terms are based on your credit history and income, you may not qualify at all. Even if you do, you might not get a lower interest rate.
- Lose access to federal benefits: If you’re refinancing federal student loans, you’ll no longer be able to apply for forgiveness programs or get on an income-driven repayment plan. Also, the forbearance programs private lenders provide typically aren’t as generous as what you’ll get with the government.
- You could end up paying more: If you request a longer repayment term, it could reduce your monthly payment, but it will also increase how much you pay in interest overall.
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Which is better: Federal consolidation or student loan refinancing?
Your situation will dictate which consolidation option is better for you, but here are some situations where it might make sense to do federal consolidation:
- You only have federal student loans
- You want to retain federal loan benefits
- The benefits of consolidation outweigh the slightly higher interest rate
On the flip side, consider student loan refinancing if:
- You have a strong credit history and income (or you have a co-signer who meets those criteria)
- You want to shorten your repayment term
- You don’t mind losing federal benefits
More importantly than deciding between the two consolidation options is understanding when to consolidate student loans and when to stick with your current plan. Carefully weigh the benefits and drawbacks of all of your options to make the right decision for you.
Compare refinancing rates before you apply
If you’re thinking about refinancing your student loans with a private lender, take some time to shop around before you choose a lender to get the best possible deal.
Purefy’s Compare Rates tool can help you do this by asking some basic questions about yourself and your student loans. In exchange, you’ll be able to compare rate quotes from multiple lenders in one place rather than needing to prequalify with each lender individually.
The process can help you maximize your savings through refinancing. It can also help you determine which refinance offer is the best option for your goals.