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A Complete Guide to Student Loan Consolidation

By Lyle Daly – Updated Feb 4, 2020 at 12:45PM

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Go from a stack of student loan bills every month to just one.

Image source: Getty Images.
A stack of bills.

Image source: Getty Images

If you were anything like the typical college student, then you may have graduated with several student loans. Between private loans and the various types of federal loans, plenty of students leave school with five or more different loans to pay off, and some even end up in double digits.

That's where student loan consolidation can make your life much easier. When you consolidate your student loans, you roll all those loans into one new loan, and that means one payment per month. You won't need to deal with the inconvenience of managing multiple loans anymore, and you'll be far less likely to miss a payment and end up with a late fee.

Before you go through with this, it's essential that you understand how student loan consolidation works, what your consolidation options are, and the potential drawbacks. In this complete guide, we'll cover everything you need to know about the process.

How student loan consolidation works

When you consolidate your student loans, you're combining multiple student loans into one repayment plan. After you've done that, you will only need to make one loan payment going forward instead of making payments towards each loan individually.

For example, let's say that you have student loans with the following (very round and easy-to-add) balances:

  • $10,000
  • $5,500
  • $4,500
  • $6,000
  • $4,000

That totals $30,000 in balances across five student loans, but you'd be making five separate loan payments and those loans may all have different interest rates.

If you consolidated those loans, you would have one loan with a balance of $30,000, which is a great way to simplify your finances.

Can you consolidate federal and private student loans?

You can, and there are two separate types of student loan consolidation available. The type you choose will depend on what student loans you want to consolidate.

The U.S. Department of Education offers direct student loan consolidation, which you can use to consolidate any federal student loans. This type of consolidation is exclusively for federal loans, though, so you couldn't consolidate private loans this way.

Your other option is private student loan consolidation. You would apply for this through a private lender, and you can use it to consolidate both federal and private loans. However, this essentially replaces your federal loans with a private loan, meaning you could no longer get federal loan benefits, such as an income-based repayment plan.

Student loan consolidation vs. refinancing

People often think that student loan consolidation and student loan refinancing are one and the same, but that's actually not the case.

Student loan consolidation is when you combine multiple loans into one, whereas student loan refinancing is when you get a new loan and use it to pay off one or more previous loans. The point of consolidation is most often to reduce the number of loans you have, although there are also plenty of other reasons to consolidate your student loans. Refinancing is done to get new terms on your student loans, such as a lower interest rate.

It is possible to refinance and consolidate your loans at the same time. You would need to do this with a loan from a private lender, though, because the Department of Education only offers student loan consolidation.

Direct student loan consolidation

Direction Consolidation Loans are used to consolidate most types of federal student loans, but they're not an option for private loans. With this type of loan, there's no credit check or application fee.

These loans have a fixed interest rate, and this rate is determined by taking the weighted average of all the loans you're consolidating, and then rounding up to the nearest one-eighth of one percent.

There are multiple repayment plan options, including income-based repayment plans, and there are loan terms available for up to 30 years.

The biggest benefits of Direct Consolidation Loans are that:

  • You can get a lower monthly payment total than what you're currently paying.
  • You don't need good credit or a cosigner to get this type of consolidation loan.
  • Your federal loans will remain eligible for income-based repayment plans and Public Service Loan Forgiveness.
  • Certain types of federal loans that aren't eligible for federal borrower protections, such as Parent PLUS Loans, can be consolidated, and the resulting consolidation loan will be eligible for those protections. This means consolidation is one way you can gain federal borrower protections that your loans normally wouldn't have.

This type of consolidation does have some notable drawbacks as well:

  • Your interest rate will increase slightly because of how interest rates are calculated for Direct Consolidation Loans.
  • This consolidation usually results in a longer term, so even though your total monthly payment amount will drop, you'll pay more interest over the lifespan of your loan.
  • You could lose certain benefits, such as discounts on your interest rate, that you have through your current loans.
  • On loans with income-based repayment plans or loans where you've made payments towards public service loan forgiveness (PSLF), you lose all the progress you've made towards loan forgiveness by consolidating.

If you're thinking about a Direct Consolidation Loan, first check to see whether you have benefits on any of your current loans that you'll lose or if you've made progress towards loan forgiveness. In that case, you should exclude those loans to avoid losing their benefits, as you're able to choose which federal loans to consolidate.

What are the requirements to get a Direct Consolidation Loan?

To consolidate federal student loans, those loans need to either be in repayment or the grace period. If you've defaulted on a loan and you want to consolidate it, then you have two options: make three consecutive monthly payments first, or agree to a Direct Consolidation Loan with one of the following repayment plans:

  • Revised Pay As You Earn Plan (REPAYE)
  • Pay As You Earn Plan (PAYE)
  • Income-Based Repayment Plan (IBR)
  • Income-Contingent Repayment Plan (ICR)

You can't consolidate a student loan if it's being collected through wage garnishment or through a court order. In these situations, the wage garnishment must be lifted or the court order must be vacated before you can consolidate the loan.

Private student loan consolidation

Advantages of private student loan consolidation are:

  • You have more flexibility to choose the loan terms you want, whether you prefer a longer term with lower monthly payments or a shorter term to pay less overall interest.
  • You may be able to get a lower interest rate if your credit is good enough.
  • You'll have the option of a variable or fixed interest rate.

The drawbacks of private student loans are:

  • You'll lose any potential federal student loan benefits with consolidation through a private lender.
  • Your credit and other financial information will affect your approval and loan terms.

With private student loan consolidation, you get a loan from a private lender and use that to pay off your other student loans. Although some private lenders charge an application fee, this is becoming less common. There will be a credit check, and if you don't have a sufficient credit score and income to meet the lender's requirements, then you'll need a cosigner.

You can use this type of consolidation for any type of student loan you have, including both federal and private student loans. The issue is that private student loan consolidation will take away the option of getting any federal student loan benefits, such as loan forgiveness or income-based repayment. For that reason, it rarely makes sense to consolidate federal loans this way.

Your interest rate and term options will depend on the lender you choose, your credit, your income, and other parts of your financial history.

What are the requirements to get a private consolidation loan?

With this type of consolidation, there is no fixed set of requirements like there are with federal loans, because each private lender will set their own borrower requirements. The most important factors will be:

  • Your credit score
  • Your income
  • Your debt-to-income ratio

For example, you may find that one lender will only accept applicants who have a credit score of at least 650 and an annual income of $30,000.

Fortunately, there are plenty of private lenders out there, and many of them don't require excellent credit or high income. It's still a good idea to improve your credit as much as you can before you apply for a private consolidation loan, though, because that will help you get a lower interest rate.

When should you consolidate your student loans?

There are a few common reasons why people choose student loan consolidation.

To have fewer loans to manage -- Undoubtedly the most popular reason to consolidate student loans is so that you don't have as many loans to keep track of. It's obviously much easier and less time-consuming to have one student loan than to have four, or seven, or a dozen.

To get a fixed interest rate -- Variable-rate student loans can be a good deal in the beginning, as they frequently have lower starting interest rates than fixed-rate loans. But as the name suggests, the interest rates on these loans can change, and that often means your once-affordable loan gets a higher interest rate than before.

If you're concerned that your variable-rate loans will have an interest rate hike, consolidating with a fixed-rate loan can give you peace of mind.

To lower your total monthly payment amount -- If your monthly loan payments are too much to handle at your current income, consolidation allows you to get one longer loan with a lower payment amount. You might also consider doing this if you're planning to finance a large purchase, such as a car or a home, and you need to lower your debt-to-income ratio.

Of course, a longer loan means you end up paying more interest. That's why you should only do this if it's necessary and not just because you want to have some extra spending money.

How to consolidate your student loans

The first thing you should do is decide which of your student loans you want to consolidate. If you have federal and private student loans, then it will usually be best to consolidate those separately. That way you can consolidate all the loans you want without losing any federal loan benefits.

Once you're ready to consolidate, here's how to do it:

How to get a Direct Consolidation Loan

1. Go to the Federal Student Aid's Direct Consolidation Loan application.

You're going to need to complete the entire application in one session, so you should check the "What do I need?" section on this page first to verify that you have all the required personal and financial information ready.

Alternatively, this site also offers a printable application that you can mail in.

2. Log in to your account and fill out the application.

The application process usually takes less than 30 minutes.

3. Wait for your consolidation servicer to complete the process.

During the application process, you'll choose a consolidation servicer. They handle the consolidation of your federal student loans after you submit your application, and they'll notify you once that process is complete.

Remember that you must keep making payments on all your student loans until you've received notification that those loans have been paid off with your Direct Consolidation Loan.

How to get a private consolidation loan

1. Check rates from multiple lenders.

Rates can vary from lender to lender, so it pays to do some comparison shopping. You can check what kind of loan terms each would offer you by providing some basic information on their sites. Lenders only run a soft credit check when you do this, which means there's no effect on your credit score.

2. Pick a lender.

Once you've seen what terms you could get from several different lenders, you can decide which one you want to go with. This will probably be whoever offers you the lowest interest rate. Just make sure you also check for any discounts the lenders offer and that you get the term length you want.

3. Submit an application.

You can fill out your application for a consolidation loan online. Expect to provide:

  • Contact information, including your billing address and phone number
  • Your date of birth
  • Your Social Security number

Lenders will also want income verification, so you'll need to have paystubs, bank statements, or another form of verification ready.

4. Pay off your old loans with your new loan.

Again, you must stay up to date on your previous loan payments until your new loan is approved and funded. After you've gotten your new loan, you can use it to pay off all your previous loans in full, and then you'll have completed the entire consolidation process.


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