After graduation, many students end up with several student loans from different lenders. Whether you have federal loans, private loans, or a mix of the two, multiple payments can be difficult to keep track of. This is why many people make the decision to consolidate their student loans, either through consolidation or through refinancing.

Loan consolidation essentially means combining multiple loans into just one loan. Generally, the two primary motivators for consolidation are lowering interest rates and combining payments into one that is easier to track. However, the lower interest rate is usually achieved through a combination of refinancing and consolidation under the correct circumstances. Therefore, consolidation may not be the right choice for you if a lower interest rate is your main priority.

Typically, loan consolidation can occur in one of two ways: either federally through the U.S. Department of Education’s Direct Loan Consolidation Program, or through a private lender. Both options have their own set of pros and cons, which can vary based on the goals, priorities, and financial situation of the borrower. Below, we have addressed the most common of concerns regarding the “Federal vs. Private” question.

Federal Loan Consolidation

Most U.S. citizens are eligible for federal loan consolidation once they graduate, drop out of school, and/or drop below half-time enrollment. Consolidating federal loans is free, and companies that charge fees to consolidate them should be avoided. When you consolidate federal loans, you get a new interest rate. This is the weighted average of your previous interest rates rounded up to the next ⅛ of 1 percent.


Federal student loan consolidation does have its fair share of benefits. Only federal loans qualify for PAYE (Pay As You Earn), REPAYE (Revised Pay As You Earn), ICR (Income-Contingent Repayment), and Public Service Loan Forgiveness. Consolidating a federal student loan that is in default also allows you to restore eligibility for federal loan benefits. These benefits include deferment, forbearance, and loan forgiveness programs. If you have many federal loan services, consolidating into one loan will make your monthly payments much easier. Rather than multiple bills every month, you’ll be making payments to just one provider.
What about student loan refinancing? Unlike consolidation, refinancing is only possible through private lenders. This means that when you refinance your federal student loans, you would no longer be eligible for federal repayment and forgiveness programs. However, keep in mind that loan forgiveness is rare, and it may not be worth holding off refinancing for.


Since consolidation essentially allows you to pay off all of your loans as one, it combines all of the payments. This means that you will not necessarily save any money by consolidating; it’ll just be a more convenient bill.
Another drawback is that any progress made towards forgiveness is nullified as soon as you consolidate your federal student loans. For example, if you’ve already made 20 consecutive qualifying Public Service Loan Forgiveness payments and then consolidate, you would then have to start from scratch. However, granted that student loan forgiveness is extremely improbable, this may not be a “make-or-break” factor for you on your journey towards consolidation.

Private Student Loan Refinancing

Private student loan refinancing involves replacing a single loan or multiple loans with a new loan, in order to get a better interest rate and term options. These can be federal loans, private loans or a combination of the two. Eligibility can be determined by your credit score, income, career, and educational background, along with other factors that contribute to your financial profile. It depends on the lender. Through a private lender, you can also consolidate and refinance jointly, which is the option more likely to save you money.


Private student loan refinancing often results in a much lower interest rate. Depending on your financial history, your interest rate could drop significantly, saving you thousands of dollars in the long run. Furthermore, some private lenders allow you to have a cosigner through refinancing, which could lower your interest rate even more.


When you refinance federal loans into private loans, you will lose certain benefits you had on the federal loans. These include access to income-driven repayment plans and federal loan forgiveness programs. Thus, private student loan refinancing and consolidation carry some different risks from the federal route.
That being said, if your financial situation allows it, private loan refinancing with the correct private lender can also be a more effective money-saving tactic because of the more competitive interest rates available. Since different private lenders take slightly different criteria into consideration while determining interest rates, private student loan refinancing requires more effort and research (as opposed to federal loan consolidation).

The Verdict

Like many choices in life, the option you decide to go with depends upon your current financial situation. As we’ve mentioned before, 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. For example, if you aren’t settled into your career or are living paycheck to paycheck, you’ll want to stick with federal consolidation so that you don’t lose forgiveness and repayment options.

However, if you have a good credit score and stable income, finding out what a private lender can offer you is a wise decision. In many cases, you might be able to lower your interest rate and save money. Since you face different circumstances in doing so, you’ll want to make sure that your finances (other existing debts, upcoming payment plans, etc.) are in order before opting for private student loan refinancing. In either scenario, be sure to thoroughly examine your consolidation options and be aware of the pros and cons of your decision. This could help you to avoid a sticky situation later on.

Please note that the information provided on this website is provided on a general basis and may not apply to your own specific individual needs, goals, financial position, experience, etc. LendKey does not guarantee that the information provided on any third-party website that LendKey offers a hyperlink to is up-to-date and accurate at the time you access it, and LendKey does not guarantee that information provided on such external websites (and this website) is best-suited for your particular circumstances. Therefore, you may want to consult with an expert (financial adviser, school financial aid office, etc.) before making financial decisions that may be discussed on this website.