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Why should you consider student loan consolidation? Graduates today are not only burdened by the high price of an education, but with the cumbersome repayment process that goes along with it. It is common for borrowers to have multiple student loan servicers upon graduation and to have to deal with repaying their loans through several secure logins. Some graduates opt to take part in auto-debit in order to try and simplify this repayment process and others disregard their payments entirely.

Student loan consolidation is often neglected as a repayment strategy because it can be hard to understand how to approach the process. In particular, many borrowers do not know whether to choose between a federal or private student loan consolidation. With that in mind, here is a breakdown of the similarities and differences between federal and private student loan consolidation to help you take control of your student loans.

Federal loan consolidation:

  • Most federal student loans are eligible to be combined into a single federal Direct Consolidation Loan
  • After completing this free process you’ll make one convenient payment
  • You may be able to lower your monthly payment if you extend your loan repayment term or enroll in an income-driven repayment plan, but you won’t get an interest rate reduction
  • The interest rate on a federal Direct Consolidation Loan is the weighted average of the rates on your existing loans
  • Private loans are not eligible for inclusion in a federal Direct Consolidation Loan
  • A PLUS loan made to the parent of a dependent student cannot be reassigned to the student during consolidation
  • Borrower can pick the servicer that will service the new loan

Remember that by consolidating and potentially switching servicers you may lose benefits associated with your previous lenders. If you’re already enrolled in a federal income-driven repayment plan or have made qualifying payments toward Public Service Loan Forgiveness, you will lose credit for any payments made if you combine your current loans into a federal Direct Consolidation Loan. Be sure to take a closer look at which options you take advantage of and wish to maintain.

Private loan consolidation (refinancing):

  • Private student loan consolidation is accomplished by refinancing — paying off existing loans, federal and private, with a new loan from a private lender
  • You may be able to significantly reduce your interest rate, depending on your financial and credit history and the loan term you select
  • Private lenders can refinance and combine both federal and private loans, so you end up with a single monthly payment
  • When you refinance federal student loans with a private lender, you lose access to benefits such as access to income-driven repayment and the potential to qualify for loan forgiveness after 10, 20 or 25 years of payments, but some private lenders may offer deferment and forbearance options

So which consolidation process should I explore?

If you currently rely on a federal income-driven repayment plan or are hoping to qualify for loan forgiveness, you’ll lose credit for payments you’ve made so far if you roll your existing federal loans into a federal Direct Consolidation Loan. On the other hand, some federal loans (including PLUS loans to graduate students and older FFEL loans) are only eligible for these programs if they are converted to a federal Direct Consolidation Loan.

Federal loan consolidation may help you lower your monthly payment and qualify for loan forgiveness if you enroll in an income-driven repayment plan or extend your loan term. But because you’re not getting a better interest rate, your total repayment costs may increase dramatically if you stretch your payments out over a longer period of time.

If you want to lower your interest rate or combine federal and private student loans into a single loan with one monthly payment, consider private loan consolidation (refinancing). As an insider tip, the interest rates you can qualify for with lenders that offer refinancing are affected by market conditions. The Credible marketplace helps you explore your private consolidation options and see if refinancing is the right option for you.

Trying to simplify your loan payments does not have to be complicated. Check out Credible and see how much you could save with private consolidation, or studentaid.ed.gov to learn more about federal student loan consolidation.