How to Consolidate Your Student Loans

If you have student loan debt, you’re not alone. Many students take out both federal and private student loans to help cover the cost of education. If you have federal student loans with different loan servicers, consolidation can simplify your loan repayment by combining multiple loans into a single monthly payment at no cost to you.

If you need help managing your debt, want more time to pay off your student loans, or want to get a lower monthly payment, here’s how to consolidate your student loans.

Student Loan Consolidation Vs. Refinancing

Simply put, consolidating federal student loans means to roll some or all of your student loan payments into one lump payment. When combined into one loan, you will have a new fixed interest rate, which is the weighted average of the rates on your previous loans, rounded up to the next one-eighth of a percent.

Technically, you can only consolidate federal student loans. When you hear about “consolidating private student loans”—combining student loans into a private loan through a private lender—this process is actually refinancing.

In both cases, you are combining multiple loans into one, but the process and benefits of each differ. For instance, you can combine federal and private loans when you refinance, but you can not consolidate state or private loans that are not federally guaranteed.

You cannot lower your rates when you merge federal student loans like you can when you refinance private and/or federal loans. And whereas you can access federal loan protections, repayment options, and programs such as the Public Service Loan Forgiveness Program through federal loan consolidation, you can’t take part in these loans programs when you refinance on the private side of things.

You can also save money with student loan refinancing, but you won’t necessarily when you combine federal loans. While you may reduce monthly payments by extending the loan term, you’ll pay higher interest, too.

How to Consolidate Federal Student Loans

With federal student loan consolidation, there is no credit requirement. Though it won’t reduce your interest rate, consolidating provides you with a single monthly loan bill and possibly lower payments by lengthening the time you have to repay.

To consolidate, you must graduate, leave school, or be enrolled less than half-time. If you meet these requirements, you can apply for Direct Loan consolidation online through the Department of Education at the studentaid.gov website and by clicking on “Complete Consolidation Loan Application and Promissory Note.”

Once you begin your application, you’ll enter which loans you want to consolidate and which you don’t. Next, you’ll choose a repayment plan based on your loan balance or one that is tied to your income. If you opt for an income-driven repayment plan, you will need to fill out the income-driven repayment plan request form. Finally, you must read the terms before submitting your application. This process should take about 30 minutes.

Applying for a consolidation loan is free, so be wary of any companies that try to charge you to consolidate for you. However, understand that you can only consolidate your federal student loans once, outside of signing up for public service loan forgiveness, and if you’re in default on your loan.

Once approved and the consolidation is complete, the federal government will pay off and replace your student loans with a direct consolidation loan. Besides getting a new fixed rate, you’ll receive a new loan term, anywhere from 10 to 30 years. Repayment begins within 60 days of when your consolidation loan is disbursed.

When To Consider Consolidating

Federal student loan consolidation may not be for everyone. Here’s when you should consider loan consolidation:

  • You need to consolidate to qualify for public service loan forgiveness programs or income-driven repayment
  • You want just one federal student loan payment
  • You are in student loan default

How to Refinance Federal and Private Student Loans

If you wish to replace multiple loans—be it private, federal, or both—with a single private loan, refinancing with a private lender, like a credit union, may be a smart option for you. Unlike federal student loan consolidation, refinancing involves a credit check and other financial history elements to determine what your new interest rate will be. For this reason, it’s important to have a solid credit report and higher credit score.

When to Consider Refinancing

If you don’t have a strong credit score or access to a cosigner, refinancing your student loans may not be the best option for you. Private loan refinancing may be the right choice for you if:

  • You have existing private student loans
  • You have good-to-excellent credit
  • You have a steady and well-paying job
  • You have a cosigner with the above characteristics

Refinancing your student loans is an effective way to lower your interest rate and save money each month. Most private lenders do not charge for refinancing, so you can refinance multiple times to get the most competitive rate. When you opt to refinance your student loans, your private lender will pay off the former lenders, and you’ll make payments only to your new lender.

However, for borrowers who are considering refinancing their federal loans, it’s important to understand that you will lose any federal loan protections, including loan forgiveness and income-based repayment plans. If you extend your loan repayment term, it could increase your total costs over the life of the loan.

Whether you consolidate or refinance, you also have the option to make automatic payments, which can further simplify managing your student debt and help ensure you make your payments in full and on-time.

Consolidate Your Student Loans

Ready to Consolidate or Refinance?

Once you’ve weighed your options and determined whether consolidating your student loans is right for you, you can apply for a consolidation loan online anytime. If you are interested in refinancing federal student loans, private student loans, or both, or taking out a private student loan, lenders like T&I Credit Union can help. Learn more about how we can help you borrow against your future to give you the help you need now.

About Tammy Newcomb