How to Consolidate Student Loans: Federal vs Private Options

Key Takeaways

• Federal student loan consolidation combines federal loans through the Direct Consolidation Loan program.
• Federal consolidation does not lower your interest rate — it uses a weighted average.
• Private “consolidation” is actually refinancing and may lower your interest rate based on credit.
• Refinancing federal loans into a private loan removes access to federal protections and forgiveness programs.

Consolidating your student loans basically means combining multiple loans together into just one loan, resulting in a single, more manageable monthly payment that may be lower than what you’re currently paying.

There are two distinct ways to consolidate student loans. The first is through the U.S. Department of Education’s Direct Loan Consolidation Program and the second is through a private lender. Each of these options offers its own unique benefits and is appropriate for different graduates depending on the type of loans being consolidated, as well as your current financial situation and credit score.

Consolidation vs Refinancing: What’s the Real Difference?

In simple terms, federal consolidation keeps your loans in the federal system and simplifies payments, while private refinancing replaces your loans with a new private loan that may offer different interest rates and repayment terms.

Here’s what you need to know about consolidating student loans through the Direct Loan Consolidation Program:

• Almost all federal loans are eligible.
• Private loans are not eligible.
• The process to consolidate your federal student loans is free. There is no application fee.
• If you have a variable interest rate currently, you can switch it to a fixed interest rate. This makes monthly budgeting much easier, because you’ll always know what your student loan payment is going to be.
• Your new interest rate is calculated as the weighted average of your existing federal loan rates, rounded up slightly to the nearest one-eighth of a percent. This means consolidation simplifies repayment but does not reduce your interest rate.
• You can select a new term for your loan with repayment options from 10 – 30 years. This allows you to either pay off your loan faster and with less interest, or to pay it off over a longer period of time with lower monthly payments.
• If you refinance federal student loans into a private loan, you permanently lose access to federal benefits such as income-driven repayment plans, Public Service Loan Forgiveness, and certain hardship protections.

Here’s what you need to know about consolidating student loans through a private lender:

• When you “consolidate” through a private lender, what you’re really doing is refinancing. This is because in addition to combining multiple loans into a single loan (consolidating), you’re also negotiating a brand-new interest rate based on your credit score and financial situation (refinancing).
• Before June 2014, only private student loans were eligible for consolidation by private lenders. However, due to recent changes, an increasing number of private lenders are now accepting federal loans. LendKey is among such lenders, accepting both federal and private student loans for refinancing.
• If you qualify for a lower interest rate due to a good credit score, you may be able to reduce your monthly payments or shorten the payment term, saving a substantial amount of money over the life of the loan. Some private lenders, such as LendKey, also allow you to have a cosigner when you refinance which could reduce your interest rates.

The bottom line…

Consolidating student loans through the Direct Student Loan Consolidation Program can be the right choice if you don’t have a great credit score and you’re in an uncertain financial situation. To begin the process, simply go to StudentAid.gov and enter your information. However – we advise against making that decision until you’ve explored all of your options, including private lenders.

If you also have private student loans, or if you’re in a strong financial situation with a good credit score, the smart thing to do is find out what a private lender can offer you. In many cases, they can help you achieve a lower monthly rate and a lower interest rate, potentially saving you thousands of dollars over the life of the loan.

Compare student loan refinance options through LendKey’s network of local banks and credit unions to see whether refinancing could lower your interest rate or monthly payment.