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Should I Consolidate My Student Loans? Here’s When It

Makes Sense
Kat Tretina ⋮ 31-39 minutes ⋮ 10/5/2020

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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
● Your interest rate won’t decrease
● Lower your monthly amount due (if
● Your principal could increase if you’re consolidating
you desire)
loans with unpaid interest
● Choose a new, more helpful federal
● You could pay more over time (if you consolidate to a
loan servicer
longer repayment term)
● Switch from a variable interest rate
● Your progress toward forgiveness programs could be
to fixed
reset, and older federal loans could be stripped certain
● Maintain or gain access to federal
benefits, such as interest rate discounts
loan repayment plans and other
government-exclusive safeguards

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

2. You don’t qualify for IDR plans or loan forgiveness
3. You want a fixed interest rate

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
Federal loans Federal and private loans
loans
Banks, credit unions, online companies and state-
Lender The Department of Education
run refinancing authorities
Key A single monthly payment – while A single-monthly payment – with the possibility of
benefit retaining federal loan protections 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 ● Eligibility requirements can be stiff (though you could
● Lower your interest rate or your apply with a cosigner)
monthly amount due ● Locking yourself into a repayment plan (though you could
● Choose a new, more helpful always refinance multiple times)
lender ● You could pay more over time (if you refinance to a longer
● Switch from a variable interest repayment term)
rate to fixed ● 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

2. You want a fixed interest rate
3. You want to reduce your monthly payment

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.

You can use our calculator to see how much you can save by refinancing your student loans:

Student Loan Refinancing Calculator

Total

Monthly

Current

New

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.

If you’re ready to refinance, check out our student loan refinancing marketplace.

Andrew Pentis contributed to this report.

Interested in refinancing student loans?

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