After graduation, many students look to consolidate their student loans. Loan consolidation essentially means combining multiple loans into just one loan. Generally, the two primary motivators for consolidation are lowering interest rates, and ultimately lowering payments (and in an ideal situation, achieving both).

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, and can suit you according to the type of financial situation you are in.

Federal Loan

Most people 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 federal loans are consolidated, 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 Pay As You Earn, Revised Pay As You Earn, income-contingent repayment and Public Service Loan Forgiveness. Unlike consolidation, refinancing isn’t available through federal programs and is only available through a private lender, and refinancing through a private lender would mean giving up access to these repayment and forgiveness programs.

Consolidating a federal student loan that is in default allows you to restore eligibility for federal loan benefits including deferment, forbearance and loan forgiveness programs.1 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.


On the other hand, you’ll probably end up paying more in interest if you opt for federal loan consolidation. This could occur due to a variety of factors. For one, consolidating your federal loans will probably extend your repayment term. Even though this means a lower monthly payment, the total amount you pay in interest over the entire duration of your loan will likely be more.

Since the interest rate on consolidated loans is the weighted average of your previous rates rounded up to the nearest ⅛ of 1 percent, it could end up being higher than your previous interest rates. Another drawback is that any progress you had made towards forgiveness is nullified as soon as you consolidate your student loans federally. For example, if you’ve made 20 qualifying  Public Service Loan Forgiveness payments and then consolidate, you’ll have to start from scratch and make 120 qualifying PSLF payments (the mandated number) before qualifying for forgiveness.1

Private Student Loan Refinancing

Private student loan consolidation involves replacing multiple loans (either federal loans, private loans or a combination of the two) with a single private loan; refinancing can involve multiple loans or a single loan with the goal of getting a better interest rate and term. Refinancing can be determined by your credit score, income, career and job history and educational background among other factors that contribute to your financial history.


Private student loan consolidation 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 the protections you had on those federal loans. These include interest-free deferment on subsidized federal loans, and access to income-driven repayment plans and federal loan forgiveness programs. Thus, private student loan consolidation carries 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, electing which option 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 a lot of money. Since you face different risks and benefits in doing so, you’ll want to make sure that your finances (other existing debts, having a steady income, upcoming payment plans, etc.) are all in order before opting for private student loan refinancing. In either scenario, be sure to thoroughly examine your options and be aware of the pros and cons of your decision on how to consolidate, so that you aren’t caught in a sticky situation later.



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