Trying to figure out a way to consolidate student loans? Here are some fundamentals to consider when comparing options.

1.  There are basically two ways to consolidate:

  • Federal Direct Loan Consolidation: This program is supported by the federal student loan program, and specifically for federal student loans.  Private student loans are not allowed to be added to a federal student loan consolidation.
  • Private Student Loan Consolidation: Private student loan consolidations are issued by credit unions, banks and other financial institutions. They are able to include both private and federal student loans together.

2. Either option can offer benefits that borrowers need to understand

  • Federal Direct Loan Consolidation Pros:
    • The federal loan program offers guarantees for approval and removal of debt in cases of death or permanent disability (but not in bankruptcy).
    • It can provide an income based repayment program that reduces the minimum monthly payment to a percentage of income.
    • Public service loan forgiveness can allow borrowers to have federal loans discharged after 10-years at a qualified job.
  • Federal Direct Loan Consolidation Cons:
    • The federal loan program is unable to actually reduce the interest rate. Instead, it uses a weighted average of all federal interest rates combined.
    • Federal consolidation cannot include private loans in the program
    • Extended loan terms under Income Based Repayment or Pay As You Earn may cost more in total interest to repay
    • Debt forgiveness is a taxable event (unless qualified for public service loan forgiveness with certain government or non-profit jobs)
  • Private Student Loan Consolidation Pros:
    • Can provide a lower rate through refinancing student loan
    • May combine many federal and private loan applications into one application
    • Cosigner options available to help for credit approval
  • Private student Loan Consolidation Cons:
    • No income based repayment options
    • No guaranteed approvals on credit based applications. No guaranteed discharge in death or permanent disability
    • Not eligible for Public service loan forgiveness

3. Fixed vs Variable Rates

  • Federal Student Loan Consolidation: This program only offers a fixed rate based on the weighted average of all federal loans being combined
    • Pro: Fixed rate does not change, cannot increase in the future.
    • Con: Cannot earn a rate reduction. No reward for Good Credit in the Federal Loan Program.
  • Private student loan consolidation: These programs may offer  a fixed or variable rate depending on the program, check for details.
    • Pro: A  variable rate may offer a much lower rate, saving more money each month.
    • Con: Variable rates are subject to change and may increase in the future, costing more each month.

4. One more thing about interest rates: Most people obsess over interest rates.  While it is important, take a step back and look at the big picture.  The real questions that need to be answered are “How Much will this cost to repay?” and “How much time until I am student loan debt free?”  Gameplan your solution around answering those questions to help find the best option.


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.