How to Consolidate Student Loans
Key Takeaways
- Federal student loan consolidation combines federal loans into one Direct Consolidation Loan.
- Consolidation does not lower your interest rate — it uses a weighted average.
- Private refinancing replaces your loans with a new loan that may offer a lower interest rate.
- Refinancing federal loans into a private loan removes access to federal repayment and forgiveness programs.
Why You Should Consolidate Student Loans
With the price of higher education on the rise, students are taking on more student loan debt to pay tuition. However, a loan from a single lender may not be enough to cover the full cost. In this scenario, most students take out multiple loans from different lending institutions. When you consolidate student loans into one new loan it simplifies your personal finances and also comes with some additional benefits.
Consolidate Student Loans vs. Refinance Student Loans
Often used interchangeably, consolidating and refinancing student loans refer to different things. If you consolidate student loans, you are taking out a new loan in the amount of all of your existing loans combined. With federal consolidation, your new interest rate is calculated as the weighted average of your existing federal loan rates, rounded up slightly. It simplifies repayment but does not reduce your interest rate. This new loan is used to pay off the old loans leaving you with just one bill to worry about every month.
When refinancing student loans, you take out a new loan to pay off the original loans but with new loan terms including an interest rate and payback period. For many, this option makes more sense because the interest rate you qualify for now may be lower than that of your original loans and you can reduce the payback period to avoid paying as much interest over time.
| Feature | Federal Consolidation | Private Refinancing |
|---|---|---|
| Keeps federal benefits | Yes | No |
| Lowers interest rate | No | Possibly |
| Requires credit check | No | Yes |
| Combines federal + private loans | No | Yes |
| Based on credit score | No | Yes |
Benefits of Consolidating Student Loans
Having numerous loans with different lenders can be a headache to manage. Making sure you make every payment on time, every month, is not only important to getting out of debt but it has a major impact on your credit score. Your credit score is used to determine credit worthiness down the road when you need it most such as buying a car or home. Consolidating your loans will leave you with one bill to stay on top of.
Additionally, there’s a good chance you used a cosigner on your original loans. The combined credit score of yourself and cosigner likely improved your chances of being approved for a loan and with a better interest rate. However having a cosigner on your loan leaves them liable for your loan as well. When you consolidate student loans, a cosigner isn’t necessary, assuming you can get approved for the new loan by yourself. This essentially frees the cosigner of any liability for your debt.
Drawbacks of Consolidating Student Loans
It’s important to be aware of the types of student loans you have. Federal student loans come with some perks such as loan forgiveness for certain career paths. 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.
How to Consolidate Student Loans
Federal Student Loan Consolidation
Federal loans are typically consolidated through the Direct Loan Consolidation Program provided by the U.S. Department of Education.
Before June 2014, federal student loans could not be consolidated by private lenders, but due to recent policy changes, some private lenders now also accept federal loans. LendKey consolidates and refinances federal and private student loans.
Private Student Loan Consolidation
Private student loans can be consolidated through banks and credit unions. You should also consider refinancing as you might be eligible for a better interest rate, saving you money.
Private and Federal Student Loan Consolidation
You can consolidate both your federal and private student loans together with a private lender such as a bank or credit union. In doing so, you’d lose your federal student loan benefits, so be sure you won’t use them before consolidating. You may also be eligible for better loan terms if you refinance. You’d end up with one bill and can save money over the course of the loan.
Step-by-Step: How to Consolidate Student Loans
Step 1: Identify Your Loan Types
Determine whether your loans are federal, private, or a combination of both. This will determine your consolidation options.
Step 2: Review Your Interest Rates and Terms
List each loan’s interest rate, balance, and repayment term. Federal consolidation uses a weighted average rate, while refinancing may offer a new rate based on credit.
Step 3: Compare Federal Consolidation vs Private Refinancing
If you have federal loans and want to keep income-driven repayment or forgiveness options, federal consolidation may make sense. If lowering your interest rate is your priority, refinancing may be worth considering.
Step 4: Check Your Credit (If Refinancing)
Private lenders evaluate credit score, income, employment, and debt-to-income ratio when determining refinance eligibility.
Step 5: Apply Through the Appropriate Program
- Federal consolidation: Apply through the U.S. Department of Education’s Direct Consolidation Loan program.
- Private refinancing: Apply with a private lender and compare rates before selecting a loan.
Step 6: Continue Making Payments During Processing
Do not stop paying your current loans until consolidation or refinancing is finalized.
Student Loan Consolidation Checklist
Before consolidating, make sure you:
☐ Know whether your loans are federal, private, or both
☐ Understand whether you will lose federal protections
☐ Compare interest rates and repayment terms
☐ Check your credit score (if refinancing)
☐ Calculate your potential monthly payment
☐ Confirm there are no prepayment penalties
☐ Understand the total cost over the life of the loan
What the Consolidation Timeline Looks Like
Week 1:
Review loans and compare options
Week 2:
Submit consolidation or refinance application
Weeks 3–5:
Loan underwriting and approval
Weeks 4–6:
Old loans paid off, new consolidated loan activated
Ongoing:
Make single monthly payment under new terms
How to Find the Best Student Loan Refinance Rates
The best refinance rate depends on your credit score, income, employment stability, and overall debt profile. Comparing offers from multiple lenders can help you secure the most competitive rate available. Even a small interest rate reduction can significantly reduce the total cost of your loan over time.
Compare student loan refinance rates today through LendKey’s network of local banks and credit unions to see how much you could save.