How to consolidate student loans & why you might want to

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Published on June 10, 2024 | 6 min read

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The Joint Consolidation Loan Separation Act went into effect in October. If you have a Joint Consolidation Loan — a federal loan type phased out in 2006 — and wish to separate your balance from that of your co-borrower, you may now do so by filling out a new form from the U.S. Department of Education. Completing the form also makes you eligible for a one-time income-driven repayment count adjustment. Both co-borrowers may submit a joint application. Alternatively, individual borrowers can submit an application if they have “experienced domestic violence by the other co-borrower; have experienced economic abuse from the other co-borrower; or are unable to reasonably access the other co-borrower’s loan information,” according to an ED announcement. After these applications are approved, each co-borrower’s loans will be separated out and consolidated into two Direct Consolidation Loans (one for each borrower).

Key takeaways

You can consolidate federal student loans to make your debt more manageable.
Private student loans can be refinanced, which is different from consolidating federal student loans.
Consolidating federal student loans instead of refinancing allows you to keep certain protections and benefits unique to federal loans.

Student loan consolidation means taking multiple student loan accounts and rolling them into a single loan account. Federal student loans are eligible for consolidation through the U.S. Department of Education’s Direct Consolidation Loan program. Though this can result in more interest paid over time, consolidation may be a potential solution if you’re struggling with student loan payments.

Private student loans can be combined through a process more commonly referred to as refinancing. However, refinancing and consolidation aren’t the same thing, even if they both combine multiple loans into one.

How is student loan consolidation different from student loan refinancing?

While the processes are similar, consolidation and refinancing differ in some ways. Each has advantages and disadvantages. Understanding the nuances can help you select the right process for you when it comes to your student debt.

Student loan consolidation is an option when you have multiple federal loans outstanding. Consolidation rolls several loans into one larger loan and a single monthly payment. This sometimes involves extending the loan repayment period to further lower monthly payments. Your new student loan interest rate will be based on the weighted average of your existing loans.

Student loan refinancing involves moving loan debt from multiple servicers to a single private lender. This can lead to a single, lower overall interest rate and monthly payment. While consolidation retains the benefits of federal loans, like access to income-driven repayment (IDR) plans and forgiveness, refinancing turns your federal loans into private ones.

Though refinancing can save you money in the long run, it means giving up any benefits you may have had as a federal loan borrower. Your eligibility and interest rate will be based on your creditworthiness. Requirements, as well as loan offers, vary by lender.

Student loan consolidation vs. refinancing

	Refinancing	Consolidation
Will my interest rate change?	Potentially	Yes, to an average of existing rates
Will my monthly payment be lower?	Maybe (this will depend on your selected repayment term and new interest rate)	Maybe (your repayment term may be longer; if so, your monthly payment may be lower)
Can I save money overall?	Yes	No
Can I keep my federal loan repayment options, forgiveness eligibility, and protections?	No	Yes
Can I merge federal and private loans into one monthly payment?	Yes	No

How to consolidate private student loans

Consolidating private student loans, known as refinancing, is much like any other debt consolidation process. You will want to compare the rates available with different lenders. Consider getting prequalified, which will require some information about your finances.

After you have identified which lender will be the best fit for your financial situation, apply for a consolidation loan. This will merge your existing student loans — potentially from multiple lenders — into one larger loan with a single servicer.

Consolidation requirements for private student loans

Requirements vary by lender. However, most will take a look at the following factors to determine your eligibility to refinance your private student loans:

Your credit score
Your debt-to-income (DTI) ratio
Your college degree (if you completed one)
Your income

To qualify for private student loan refinancing, you’ll need a steady income and a solid credit score of about 670. The application process will also require documents such as your Social Security number, Driver’s license or government ID, loan payoff statements from your existing lenders or servicers and proof of employment, including pay stubs or W-2 forms.

How to consolidate federal student loans

To consolidate your federal student loans, first complete an application form for direct consolidation online or by mail. Once you have selected a repayment plan and loan servicer, your application will be processed. This takes around six weeks, according to the U.S. Department of Education.

About two weeks before your new consolidation loan is disbursed, you should receive a loan summary statement from the new servicer. This document will outline the details of your new loan, including the total balance, interest rate, and repayment schedule.

The statement should include specifics about your first payment due date. You will have 10 business days after receiving this statement to review it and cancel your application if you change your mind.

In the meantime, you should continue making payments to avoid credit or financial consequences.

Consolidation requirements for federal student loans

The U.S. Department of Education sets requirements for consolidating your federal student loans. For starters, any loans you wish to consolidate must be in either the grace period or active repayment status.

If your loans are in default, you’ll need to make an approved repayment arrangement before you can consolidate. As an alternative, you may be able to set up your new Direct Consolidation Loan under one of four IDR plans:

Income-Based Repayment (IBR)
Pay As You Earn (PAYE)
Saving on a Valuable Education (SAVE)
Income-Contingent Repayment (ICR)

In general, you can’t consolidate an existing federal consolidation loan. However, there’s an exception to this rule if you include another eligible student loan in your new consolidation.

The Department of Education might also allow you to reconsolidate an existing FFEL Consolidation Loan that’s past due or in default if you can qualify for a new income-driven repayment plan.

On top of the requirements above, only certain federal student loans are eligible for consolidation:

Auxiliary Loans to Assist Students
Direct PLUS Loans
Direct Subsidized Loans
Direct Unsubsidized Loans
Federal Insured Student Loans
Federal Perkins Loans
Guaranteed Student Loans
Health Education Assistance Loans
Health Professions Student Loans
Loans for Disadvantaged Students
National Defense Student Loans
National Direct Student Loans
Nurse Faculty Loans
Nursing Student Loans
PLUS Loans from the Federal Family Education Loan (FFEL) Program
Parent Loans for Undergraduate Students
Subsidized Federal Stafford Loans
Supplemental Loans for Students
Unsubsidized and Nonsubsidized Federal Stafford Loans

Should you consolidate your student loans?

If you’re looking for a lower interest rate and aren’t planning on using any federal benefits, refinancing your student loans with a private lender might be a good fit. Refinancing is the only consolidation option if your existing loans are private.

On the other hand, if you have federal student loans and a poor credit score, or you need to bring your loans current or want to hang onto your federal student loan benefits, consolidating your federal student loans might make more sense.

Advantages of consolidation

The main benefits of federal student loan consolidation include:

Longer repayment periods: If you need more cash in your pocket right now, consolidating your federal student loans may help you extend the life of your loan. This longer repayment period will generally reduce the size of your monthly payments.
One convenient monthly payment: Consolidating, like refinancing, has the effect of combining multiple monthly payments into one.
Retain federal student loan benefits: When you consolidate federal student loans, you can still take advantage of income-driven repayment plans, forgiveness options and repayment hardship plans in the future. These benefits no longer apply if you refinance your loans with a private lender.
Potentially qualify for new benefits: In some cases, consolidating federal student loans may help you qualify for an income-driven repayment plan or Public Service Loan Forgiveness (PSLF). Borrowers with federal Direct Loans or Federal Family Education Loan Program (FFELP) loans who consolidate their loans on or after September 1, 2024, will have any eligible payments from before consolidation counted toward their PSLF progress.

Disadvantages of consolidation

Federal student loan consolidation isn’t the right option for everyone. Some drawbacks to consider are:

Potentially higher interest rate: The interest rate on your new loan will be the weighted average of the loans you consolidate, rounded up to the nearest eighth of a percent. While you might qualify for a lower interest rate if you refinance to a private loan, consolidation doesn’t come with the same potential benefit.
Higher overall interest: Extending your repayment timeline will ultimately increase the total amount you pay in interest.
Potential loss of certain benefits: Consolidation may result in the loss of some borrower benefits, like discounts on interest rates, principal rebates and certain student loan cancelation options.

How to decide which is right for you

Before choosing, use a student loan refinance calculator to help you crunch the numbers. The U.S. Department of Education also provides a Loan Simulator tool to assist you.

As with any financial decision, it’s important to do your homework before consolidating your federal student loans. One of the best ways to determine whether consolidation is the right move in your situation is to compare the benefits and drawbacks.

Alternatives to student loan consolidation

Borrowers often seek to consolidate their student loans to lower their interest rates or monthly payments. Alternatively, you may learn whether you are eligible (or will be in the future) for student loan forgiveness.

If your main goal is shrinking your monthly payment, you should also look into income-driven repayment (IDR) options. As with loan forgiveness, these are only available for federal loan borrowers. Both can limit your monthly payment to a percentage of your income based on family size.

The bottom line

If you have federal student loans and want to merge your monthly payments without losing federal benefits, your only option is to consolidate through the Direct Consolidation Loan program. But before you do this, consider potential drawbacks.

For example, if you choose a longer repayment term, you could pay more in interest over the life of the loan. Plus, unlike student loan refinancing, consolidating your loan won’t allow you to lower your overall interest rate. Understanding the pros and cons of consolidating your loans can help you make the best financial decision.