Many college graduates who borrow money to finance their education end up with multiple student loans. I ended up with about a dozen between my undergraduate degree and graduate school.

If you have loans with more than one servicer, it can be a pain to keep track of several monthly payments and otherwise maintain the loan accounts. If this sounds like something you're dealing with, loan consolidation could be the solution. Here's a rundown of what student loan consolidation and refinancing are, which might be the best move for you, and what steps you might take next.

Consolidation vs. refinancing

Before we go any further, it's important to clear something up. When talking about combining student loans, people often use the terms "consolidation" and "refinancing" are often used interchangeably. However, while both involve combining student loans, they're otherwise completely different.

Consolidation simply means combining multiple existing loans into one, and in the student loan world, a "consolidation" generally refers to a direct consolidation loan, which is used to combine federal loans. In this case, you don't actually receive an entirely new loan; rather, your existing loans (and their APRs) are simply rolled into a single loan known as a direct consolidation loan, or DCL. Your new interest rate will be a weighted average of the interest rates on the loans you're consolidating. If you had two $10,000 federal student loans, one at 4% interest and one at 6% interest, you'd receive a $20,000 consolidation loan with a 5% interest rate.

On the other hand, refinancing refers to obtaining a new loan to replace your existing student loan or loans, and it's done through private lenders. You'll receive a new interest rate and loan terms that are based on your credit history, employment situation, income, and other criteria.

The main goal of loan consolidation is typically to simplify repayment by replacing several monthly loan payments with one. As a personal example, before I consolidated my undergraduate student loans, I had six separate loans to worry about. With refinancing, there are several potential perks, but the main goal is typically to lower your interest rate.

Consolidating federal student loans

A direct consolidation loan allows you to combine several federal student loans into one. This gives you a single monthly payment while allowing you to retain the benefits that come with federal student loans. We'll get into those a little later on, but features like loan forgiveness programs and income-driven repayment plans are unique to federal student loans.

In addition to a single monthly payment, a Direct Consolidation Loan can give you more time to repay your loans (as much as 30 years), and any variable-rate federal loans you may have will switch to a fixed interest rate.

Speaking of interest rates, as I mentioned earlier, your old interest rates will determine the interest rate of your consolidation loan. More specifically, the weighted average of your existing interest rates will be rounded up to the nearest one-eighth of a percent.

It's also worth mentioning that if you have both subsidized and unsubsidized loans, you'll end up with two consolidation loans (although you'll make one payment to a single loan servicer). This is a good thing, as it allows you to retain the valuable benefits of the subsidized loans in the event you eventually need to enter a deferment, i.e., a period when you can temporarily stop making payments without racking up more interest.

How to consolidate your federal student loans

To qualify for consolidation, your federal student loans must be in repayment or still in their grace period. If any of your student loans are in default, you'll need to make satisfactory repayment arrangements before they can be consolidated.

The application for a direct consolidation loan is available on It's important to note that there are several third-party companies that may offer to help you consolidate your loans, for a fee. Don't give them any money -- the application process for consolidation is quick, easy, and free, so there's no need to pay anyone to do it for you.

You can consolidate a wide variety of federal student loans, including Federal Stafford Loans, Federal Direct Loans, FFEL loans, Federal Perkins Loans, Federal Direct Plus Loans, and more.

Before you apply, consider that if you've already made significant progress toward Public Service Loan Forgiveness, it's probably best to leave your existing loans as-is. While direct consolidation loans qualify for the PSLF program, you'll lose credit for any payments you've already made if you consolidate your loans.

Refinancing student loans with private lenders: Pros and cons

As I mentioned earlier, most borrowers' primary reason for refinancing student loans is to save money by obtaining a lower interest rate. You could also potentially obtain more flexible terms, such as a longer repayment period, which would lower your monthly payment. In addition, if you've established a good credit history since obtaining your original student loans, refinancing can allow you to remove a co-signer from your loan obligations.

On the other hand, there are some good reasons not to refinance, especially if you have federal student loans. Just to name a few of the reasons you may not want to refinance:

  • You anticipate that your federal loans will eventually qualify for loan forgiveness (for example, through the Public Service Loan Forgiveness program). You will lose your eligibility if you refinance your federal loans through a private lender.
  • You currently qualify for, or want to qualify for, income-driven repayment plans.
  • Your loans (federal or private) already have lower interest rates than you're likely to get from the private market.
  • You have an unstable employment situation or some other reason why you may need to defer your loan payments in the future. Some refinancing lenders have deferment provisions, but this isn't common, and even if they do, the terms are unlikely to be better than what federal loans offer.

Remember that refinancing doesn't need to be an all-or-nothing decision. You can choose to refinance some of your student loans (only your private loans, for example) while leaving others alone.

How to refinance your student loans

The student loan refinancing market has grown dramatically over the past few years, and to be clear, this is a good thing for borrowers. Not only are there more student lenders competing for business, but many reputable lenders have greatly simplified the refinancing process; an application can be completed from start to finish in a matter of minutes.