Should I Consolidate My Student Loans? Here’s When It Makes Sense
Kat Tretina is a personal finance writer focused on helping people pay down debt and boost their incomes. Her own experience paying off $35,000 student loans ahead of schedule thanks to side hustles helps inform her writing on debt repayment, student loans and investing topics. Her work has been featured in publications like The Huffington Post, MarketWatch, Business Insider, and more.
If you’ve heard about student loan borrowers changing the terms of their debt to make it easier to repay, you might be asking yourself an important question: Should I consolidate my student loans?
The truth is, that might not be the exact right question.
Often confused, consolidation and refinancing are both potentially helpful options for borrowers. Consolidation involves grouping your federal loans with the government, and the refinancing calls for simplifying the repayment on all your loans (federal and private) with a bank or similar financial institution.
To determine when to consolidate student loans or refinance them, if at all, let’s review the following…
Student loan consolidation basics
If you have multiple federal student loans and want to simplify your payments, one option is to consolidate your debt with a Direct Consolidation Loan. When you consolidate your loans, the federal government issues you a new loan for the amount of your old ones. Moving forward, you’ll have one single payment and one large loan rather than several.
The interest rate on a Direct Consolidation Loan is fixed, meaning it will stay the same for the length of your loan. The rate is the weighted average of the interest on your previous loans.
By taking out a Direct Consolidation Loan, you can minimize the stress of your debt while retaining your federal loan benefits. Often, a Direct Consolidation Loan can help you qualify for beneficial federal programs such as income-driven repayment (IDR) plans.
Should I consolidate my loans? Review the pros and cons first…
| Pros | Cons |
|---|---|
No credit check necessary to qualify Receive a single monthly bill Lower your monthly amount due (if you desire) Choose a new, more helpful federal loan servicer Switch from a variable interest rate to fixed Maintain or gain access to federal loan repayment plans and other government-exclusive safeguards | Your interest rate won't decrease Your principal could increase if you're consolidating loans with unpaid interest You could pay more over time (if you consolidate to a longer repayment term) Your progress toward forgiveness programs could be reset, and older federal loans could be stripped certain benefits, such as interest rate discounts |
When to consolidate student loans
Loan consolidation isn’t for everyone, but it does have certain benefits that can help you beyond just streamlining your payments. Here are three situations where consolidating your debt makes sense.
1. You want to lower your monthly payment
When you graduate, you’re automatically enrolled in a 10-year Standard Repayment Plan. If you can’t afford your payments, consolidating can help. When you take out a Direct Consolidation Loan, you can extend your repayment term to up to 30 years, significantly reducing your payment.
You’ll pay more in interest over the length of your loan with the longer repayment term, but the trade-off is that you’ll have more breathing room in your budget in the early stages of your career.
2. You don’t qualify for IDR plans or loan forgiveness
If you have older federal loans through the Federal Family Education Loan (FFEL) Program or Perkins Loans, you don’t qualify for the following benefits:
- IDR plans: Under an IDR plan, your repayment term is extended, and your monthly payment is capped at a percentage of your discretionary income. Depending on your income and family size, you could qualify for a payment as low as $0. After 20 to 25 years of making payments, the remaining balance is forgiven. But you’ll owe taxes on the amount that was wiped away.
- Public Service Loan Forgiveness (PSLF): If you work for a qualifying nonprofit organization or government agency, you might be eligible for loan forgiveness through PSLF. After making 120 qualifying payments – payments made under an IDR plan qualify – the remaining balance of your loans is forgiven, tax-free.
But there’s a workaround: When you consolidate your loans, they become part of the Direct Loan Program. Moving forward, you could now be eligible for both IDR plans and loan forgiveness.
3. You want a fixed interest rate
If you have older federal loans, you may have some with variable interest rates. That means the interest and monthly payment can change according to market conditions.
If you want the stability of a fixed-rate loan with steady payments, consolidating can help. Once you consolidate, your new loan will have one fixed rate and a payment that stays the same for the duration of your loan.
Consolidating vs. student loan refinancing
| Consolidation | Refinancing | |
|---|---|---|
| Eligible loans | Federal loans | Federal and private loans |
| Lender | The Department of Education | Banks, credit unions, online companies and state-run refinancing authorities |
| Key benefit | A single monthly payment – while retaining federal loan protections | A single-monthly payment – with the possibility of lowering your interest rate to save money |
Although some people use the terms “consolidation” and “refinancing” interchangeably, they’re very different. Although a Direct Consolidation Loan has some benefits, it’s unlikely to save you money. And if you have private student loans, you’re not eligible for consolidation.
Refinancing works differently. With this approach, you take out a refinancing loan from a private lender for the amount of some or all of your federal or private loans. The refinanced loan can have entirely different terms, such as a new…
- Repayment period
- Minimum monthly payment
- Interest rate
But there are also some drawbacks to refinancing student loans. If you refinance federal loans, for example, you’ll lose out on perks such as access to IDR plans and PSLF.
Should I refinance my loans? Review the pros and cons first…
| Pros | Cons |
|---|---|
Receive a single monthly bill Lower your interest rate or your monthly amount due Choose a new, more helpful lender Switch from a variable interest rate to fixed | Eligibility requirements can be stiff (though you could apply with a cosigner) Locking yourself into a repayment plan (though you could always refinance multiple times) You could pay more over time (if you refinance to a longer repayment term) Losing safeguards specific to federal loans |
When to refinance your student loans
In some situations, refinancing your student loans may be a better option for you than consolidation. Here are some situations where refinancing can help.
1. You want to save money over the length of your loan
Through refinancing, you could qualify for a lower interest rate, which can help you save hundreds or even thousands of dollars over the length of your loan.
For example, if you had $35,000 in student loans, a 10-year repayment plan and a 7.00% interest rate, you’d repay a total of $48,766 over the length of your loan, according to our monthly payment calculator. Because of interest, you’d pay nearly $14,000 on top of the amount you borrowed.
But if you refinanced and qualified for a 10-year loan at a 4.00% interest rate, you’d repay $42,523. By taking a few minutes to submit your refinancing application, you’d save over $6,000.
2. You want a fixed interest rate
If you have private student loans – or older federal loans, as mentioned – you might have a variable interest rate. Because variable rates can fluctuate over time, your payments can increase, too.
If you prefer one set payment each month, you can refinance your loans and opt for a fixed interest rate. Your rate will never change, so your payments stay the same for the length of your repayment.
3. You want to reduce your monthly payment
If you’re struggling to afford your monthly payment, refinancing can help reduce it. You can qualify for a lower interest rate and a longer repayment term, decreasing how much you owe each month.
For example, if you had $30,000 in loans, eight years left of repayment and an interest rate of 7.00%, your monthly payment would be $409. If you qualified to refinance at a 4.00% rate and extended your term to 15 years, your payment would drop to $222. Thanks to refinancing, you’d free up $187 a month in your budget.
Beware of consolidation and refinancing scams
In recent years, many scams have arisen that prey on borrowers struggling to keep up with their payments. For example, some companies will offer to consolidate your loans for you for a fee.
But consolidating your federal loans is completely free, and there’s also no fee to refinance student loans.
When it comes to consolidating or refinancing your loans, avoid companies that try to charge you fees to get started.
Should I consolidate my student loans?
The answer to this question depends on several factors, including whether you want to simplify your payments with the federal government or save money by refinancing with a bank, credit union or online lender.
Remember that while refinancing your old private student loans might be a no-brainer, stripping your federal loans of their government-exclusive protections is a more complicated question – and only you can answer it.
Weigh the pros and cons of consolidating student loans or refinancing them to choose a secure path for you and your finances.