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Student Loan Consolidation: Is It Right For Me?

Student loan consolidation combines multiple federal student loans into a single loan with one monthly payment.

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By Janet Berry-Johnson

Written by

Janet Berry-Johnson

Writer

Janet Berry-Johnson is an authority on income taxes and small business accounting. She was a CPA for over 12 years and has been a personal finance writer for more than five years. Janet has written for several well-known media outlets, including The New York Times, Forbes, Business Insider and Credit Karma. In 2021, Canopy named her one of the Top 10 Influential Women in Accounting and Tax.

Edited by Renee Fleck

Written by

Renee Fleck

Editor

Renee Fleck is a student loans editor with over five years of experience in digital content editing. Her work has been featured in Fast Company, Morning Brew, and Sidebar.io, among other online publications. She is fluent in Spanish and French and enjoys traveling to new places.

Updated November 14, 2023

Editorial disclosure: Our goal is to give you the tools and confidence you need to improve your finances.

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Leaving college with multiple student loans can be overwhelming. As you start repaying that debt, you may want to consider student loan consolidation or refinancing. Both options may help you save money or at least feel more in control of your monthly finances, but there are major differences.

In this article, we’ll explain the pros and cons to help you decide if student loan consolidation or refinancing is the right option for you. 

Student loan consolidation vs. refinancing

Choosing between student loan consolidation and refinancing is a big decision. While both options adjust your loan payments, they have different benefits and requirements. 

Student loan consolidation generally refers to federal student loans. By combining your debts into a Direct Consolidation Loan, you can merge all or some of your federal student loans into a single new loan. Your interest rate on the new loan is a weighted average of the rates on all of the consolidated debt.

One of the perks of federal consolidation is that you can consolidate multiple types of federal loans, including subsidized, unsubsidized, federal PLUS, and Perkins Loans. In addition, you don’t lose any federal student loan protections, such as income-driven repayment, loan forgiveness, deferral, or forbearance options. The downside is you can’t include any private student loans in federal consolidation. 

Student loan refinancing involves taking out a new private student loan and using it to pay off your existing federal and/or private student loans. The new loan has a different interest rate and loan term, allowing you to potentially lower your interest rate or reduce your monthly payments by extending the loan term.

The downside of refinancing is that you lose many of the protections that come with federal student loans.

Federal consolidation
Private refinancing
What is it?
Combines multiple federal student loans into one single federal loan
Replaces existing federal and/or private student loans with a new private loan
Eligible debts
Federal student loans
Federal and private student loans
Interest rates
Fixed rate based on weighted average of your existing federal loans
Based on market interest rates and your personal credit
Terms
Typically 10 to 30 years
Typically capped at 20 years
Other factors
Eligible for benefits like income-driven repayment, loan forgiveness programs, deferral, or forbearance
Must qualify for a loan based on credit score and income requirements. No access to federal benefits.

Federal student loan consolidation

Federal student loan consolidation makes sense for borrowers with multiple federal loans who want one monthly payment to simplify their finances.

Consolidation won’t lower your overall interest rate, but you’ll keep the option to take advantage of student loan forgiveness programs and income-based repayment plans.

Eligibility requirements

Student loan consolidation is easier to qualify for than private student loan refinancing because your credit score and income aren’t a factor.

Most types of federal student loans are eligible for consolidation. To qualify, you must have graduated or dropped below half-time enrollment at school.

Interest rates and terms

The interest rate on student loan consolidation is a weighted average of the rates on the loans you include, rounded up to the nearest one-eighth of a percentage point. For example, let’s say you have four student loans, each with a balance of $10,000. Those loans have interest rates of 5%, 6%, 6.5%, and 6.75%. In that case, the interest rate on your new loan would be 6.125%. That’s (5 + 6 + 6.5 + 6.75) / 4 = 6.0625, which, when rounded up to the nearest one-eighth of one percent, is 6.125%.

In other words, you’d have a higher interest rate than one of your loans but a lower rate than the other three loans.

Depending on the amount you consolidate, you might also have the option to extend your loan term to up to 30 years to keep your monthly payments more affordable.

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Keep in mind:

Think carefully before extending your loan term. Your monthly payment may be lower, but you’ll likely end up paying more interest over the life of the loan.

How to apply

To consolidate your federal student loans, log into your account at StudentAid.gov and complete the free Direct Consolidation Loan Application. You’ll need to provide your contact information, income, and information on your existing loans.

Once you submit your application, it takes 30 to 45 business days to process your application. In the meantime, continue to make payments on your existing loans as usual.

Once your application is approved, you’ll receive a statement summarizing the new loan terms, repayment schedule, and the total interest you’ll pay over the life of the loan.

Pros and cons

Before you complete a loan consolidation application, it’s important to understand the advantages and downsides.

Pros:

  • You’ll have the option to extend your repayment term
  • You won’t lose access to federal protections, including student loan forgiveness programs like income-driven repayment, deferral, or forbearance 

Cons:

  • You may pay more interest over the life of the loan if you extend your repayment term
  • You won’t reduce your overall interest rate

Private student loan refinancing

Private student loan refinancing is available on any loan — federal or private. However, if you include federal student loans in a private refinance, you lose the benefits available to federal loan borrowers.

This isn’t always a bad thing, though. It depends on your financial situation and what you’re trying to achieve. For example, if you want to pay off your loans faster, you may benefit from refinancing into a loan with a shorter term and lower interest rate.

Check out: How To Refinance Your Student Loans in 6 Steps

Eligibility requirements

Eligibility requirements for private student loan refinancing vary based on your qualifying factors, including your credit score, income, and debt-to-income ratio (DTI).

Every lender has different requirements and terms, so it’s important to shop around and get prequalified by different lenders. However, some common eligibility requirements include:

  • Being a U.S. citizen or permanent resident alien
  • Graduating with a bachelor’s degree or higher
  • Credit score of at least 680

Interest rates and terms

The interest rates and terms on private student loan refinancing vary by lender and depend on your credit profile and income. For example, if you have good or excellent credit, you’ll probably have a better chance of securing a lower interest rate than someone with average or poor credit.

How to apply

Each refinancing lender has different application requirements, but many offer online applications and the ability to prequalify without impacting your credit. Consider checking out a handful of lenders to compare your options.

Compare Rates Now

Pros and cons

As with loan consolidation, there are pros and cons to consider before applying for student loan refinancing.

Pros:

  • Potential to lower your interest rates
  • You may be able to include a cosigner for better rates and loan terms

Cons:

  • You lose access to federal protections when you refinance federal student loans
  • You may not qualify if you have poor credit and low or no income
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Should I consolidate my loans or refinance them?

Deciding whether to take advantage of student loan consolidation or refinancing is a big decision. So which should you choose?

Consider consolidation if you don’t want to lose out on federal loan benefits, such as student loan forgiveness, or if you worry your income may decrease and you’ll want to apply for an income-driven repayment plan in the future.

On the other hand, consider refinancing if you have excellent credit and a low DTI. This means you’ll have a better chance at qualifying for a lower interest rate, which could help you save money. However, you should only consider refinancing if you have private student loans or aren’t concerned about losing federal protections. 

Meet the expert:
Janet Berry-Johnson

Janet Berry-Johnson is an authority on income taxes and small business accounting. She was a CPA for over 12 years and has been a personal finance writer for more than five years. Janet has written for several well-known media outlets, including The New York Times, Forbes, Business Insider and Credit Karma. In 2021, Canopy named her one of the Top 10 Influential Women in Accounting and Tax.