What you need to know about student loan consolidation

Student loan consolidation can be helpful, but it’s really important to understand the pros and cons before taking any action

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Interested in consolidating your private or federal student loans? Learn about the pros and cons of this financial move.  (Shutterstock)

Student loan consolidation involves combining multiple student loans into one loan. When you apply for student loan consolidation, you receive a new interest rate. If the rate is lower than your original average interest rate, you can save money. 

Two types of student loan consolidation are possible — Direct Consolidation Loans for federal loans and a private refinance loan (which combines federal loans, private loans, or a combination of both into one private loan).

Keep reading for more insight into how student loan consolidation works for both federal and private student loans.

Private student loan consolidation is also called refinancing. You can learn more about student loan refinancing by visiting Credible and comparing rates from multiple private student loan lenders.

How to consolidate federal student loans

If you have multiple federal student loans, you can consolidate them into a new federal student loan known as a Direct Consolidation Loan.

Here are the steps you’ll generally need to take to consolidate federal student loans: 

  1. Choose which loans you want to consolidate. You may decide you don’t want to consolidate all your federal student loans. Pick the ones you want to consolidate before applying.
  2. Complete the Federal Direct Consolidation Loan Application and Promissory Note. While filling out this free application, you confirm the loans you want to consolidate and agree to repay the new Direct Consolidation Loan.
  3. Make payments. Once you complete the consolidation process, you’ll only have one loan payment to make each month instead of multiple.

Consolidating federal student loans is fairly quick and easy. You have to complete the entire process in just a single online session, which usually takes less than 30 minutes.

Requirements to consolidate federal student loans

You must meet certain requirements if you want to consolidate your federal student loans, such as:

  • The loans you’re consolidating must be federal student loans.
  • Loans must be in repayment or a grace period.
  • If you have an existing consolidation loan, you have to include an additional eligible loan in the consolidation (some exceptions apply).
  • If the loan is in default, you have to make satisfactory repayment arrangements (three consecutive monthly payments) or agree to repay your new Direct Consolidation Loan under select repayment plans.
  • A wage garnishment order must be lifted, if one is in place for a defaulted loan.

When you should consider consolidating federal student loans

One of the main benefits of consolidating federal student loans is simplifying the repayment process. When you consolidate multiple loans into just one loan, you then only have to make one payment a month and can easily see how much you owe in total. 

But consolidating may not always make the most sense. It’s worth noting that if you have unpaid interest on existing federal student loans, when you consolidate them, that interest will be added to your balance and it can increase. Keep in mind that you may also lose your progress toward student loan forgiveness if you’ve been making payments under an income-driven repayment plan. 

Consolidating federal loans into private ones results in losing access to federal benefits, like student loan forgiveness programs and income-driven repayment plans, so it’s important to carefully consider your options if you do decide you want to consolidate federal loans into private ones. 

Deciding whether or not to consolidate federal student loans all comes down to your unique preferences and financial goals. 

If you decide to refinance, you can easily compare prequalified rates from multiple lenders using Credible. 

How to consolidate private student loans (also called refinancing)

You can’t consolidate private student loans with a federal Direct Consolidation loan — but plenty of private student loan issuers offer consolidation, which is often called refinancing. Here are the steps you’ll typically take to consolidate private student loans (or a mixture of federal and private loans or just federal loans):

  1. Review your credit score. If your credit score is higher than when you initially applied for your private student loans, you may qualify for a better interest rate, which can save you money on interest payments.
  2. Shop around. Check out a few different lenders to see who can offer you the best rates. The lower the interest rate you get, the more money you can save. You can prequalify with a soft credit check to get an idea of the types of rates you qualify for.
  3. Choose terms. Chances are, you’ll be able to choose between a few different repayment terms. The longer terms you choose, the lower your monthly payments will be, but the more you’ll pay in interest.
  4. Gather required documents. With private student loan consolidation, you’ll typically need to submit supporting documentation to complete the application process, like tax forms, pay stubs, or W-2s. You’ll also need to provide a payoff statement that tells the lender exactly how much of your current loan balance the new loan will need to pay off.
  5. Submit your application. Apply for the loan you’ve chosen and wait to hear from the lender. If you’re approved, the lender will pay off your existing student loans. But be sure to continue making payments on your loans until you get confirmation that they’ve been paid in full.

Requirements to consolidate private student loans

Private lenders have different consolidation requirements than the federal government. While all lenders have unique requirements, you may run into the following:

  • Having a certain credit score
  • Applying with a cosigner if your credit score is low
  • Providing supporting documentation
  • Making a certain amount of income

When you should consider consolidating private student loans

Consolidating private student loans can make a lot of sense if you can secure a lower interest rate. That way, you can streamline the repayment process (which is really helpful if you have loans from multiple private lenders) and potentially save money on interest. 

If you’re thinking of refinancing federal loans into a private one, that’s possible but not always the best move to make. Remember — you lose access to federal benefits when you do this.

Compare all your options carefully and do your research to make sure private student loan consolidation makes sense for your unique situation. 

To get started on refinancing your student loans, visit Credible and compare prequalified rates from multiple lenders.