How To Consolidate Student Loans: A Step-by-Step Guide

When it comes to student loans, many use the terms “consolidation” and “refinancing” interchangeably. But in reality, these are two separate processes. Consolidation applies to federal student loans, while refinancing can apply to both federal and private student loans.

With student loan borrowers carrying a median of $20,000 to $24,999 in loans, it’s helpful to get clear on both federal loan consolidation and private student loan refinancing. This guide explains how to consolidate student loans and explores the differences between consolidating and refinancing.

Current student loan refinance rates

What does it mean to consolidate student loans?

Consolidating student loans involves combining multiple federal student loans into a single, Direct Consolidation Loan. After consolidating your federal student loans, you’ll only have one monthly payment to manage.

If you have private student loans or a mix of federal and private loans, you can also consolidate several loans into a single loan through refinancing. But the process will look different from federal student loan consolidation. 

How to consolidate federal student loans

Consolidating can combine multiple federal loans into a single new federal loan. For many borrowers, simplified payments can make life easier. Plus, you may see a lower monthly bill if you extend your loan term. 

Although you can apply with a paper application via mail, the Department of Education recommends applying on its website. Here’s how to consolidate federal student loans online:

1. Gather your information: It’s helpful to pull together the details you’ll need to complete the application. Be prepared to provide a verified FSA ID, your contact information, and income information.
2. Log in to StudentAid.gov: After you log in, navigate to the Direct Consolidation Loan application.
3. Fill out the application: It should take around 30 minutes to fill out the application. You don’t need to complete the entire application in one sitting.

Once you submit your application, you’ll need to wait for the Department of Education to process it. It often takes four to six weeks before your application is approved and the new consolidation loan is disbursed. You must begin repayment of your new loan within 60 days of disbursement.

The new Direct Consolidation Loan will have a different fixed interest rate that’s the weighted average of the loans you consolidated, rounded up to the nearest one-eighth of a percent. 

How to consolidate private loans through refinancing

If you have multiple private student loans or a mixture of private and federal loans, you can refinance them into a single loan. Here’s a look at the process:

1. Gather your information: You’ll need to share financial details and your contact information with potential lenders. Being prepared can make things easier. 
2. Compare offers: Seek out quotes from multiple lenders to compare rates across companies. Look for the lender offering you the best rates and terms. You can easily compare rates from top lenders all in one place with Credible.
3. Finalize your refinance: If you submit an application and receive an approval, you’ll then sign any necessary documents to complete the refinance. 
4. Pay off your old loans: When the new loan disburses, the funds may be automatically sent to your old lenders to pay off those loans. If not, you’ll need to tackle that chore on your own.

After you’ve completed the refinance, you’ll hopefully walk away with a lower interest rate and a clear student loan repayment timeline.

Pros and cons of student loan consolidation

As with all financial decisions, there are some pros and cons of student loan consolidation. The table below highlights some of the advantages and disadvantages:

Advantages of student loan consolidation

“Consolidating federal student loans can help borrowers ease their monthly accounting by streamlining multiple loan payments into a single monthly bill,” says Leslie Tayne, founder and head financial attorney of Tayne Law Group. 

“Also, if the borrower consolidates federal loans to a Direct Loan, it could help them qualify for an income-driven repayment plan, which might not have been previously accessible to them, as some federal loans don’t qualify,” she adds. Parents who took out parent PLUS loans can also access loan forgiveness when they consolidate and meet eligibility criteria. 

Disadvantages of student loan consolidation

A major downside of student loan consolidation is potentially extending your loan term. 

“By stretching your newly consolidated loan out several years, you actually increase its total cost,” says Howard Dvorkin, chairman of Debt.com.

Additionally, if you opt to refinance your federal and private student loans into a single private loan, you’ll permanently lose access to federal borrower protections.

When is consolidation the right choice?

Consolidation can make sense for some borrowers, but it’s not the right fit for everyone.

“In general, I’m against consolidating any kind of debt. I prefer to solve them,” says Dvorkin. “Consolidating your debt is like a chocoholic consolidating their consumption from two small candy bars a day into one big bar per day. It’s the same amount of sugar and calories. You didn’t really solve anything.”

While consolidating loans may only lead to simplified payment options for some, other federal borrowers can tap into bigger benefits through a consolidation.

“Consolidating federal student loans can be a smart option for borrowers who want access to repayment plans they currently don’t qualify for, such as income-driven repayment,” says Tayne.

“Consolidation of federal loans can also simplify monthly payments by combining multiple loans, help bring defaulted loans back into good standing, and potentially lower monthly payments for those facing financial hardship,” she explains.