How to Consolidate Student Loans

Are you overwhelmed by student loan debt? If so, you might consider consolidating or refinancing your loans to lower your monthly payments. In many cases, that can be a smart financial move. But before deciding to consolidate or refinance, take a closer look at the pros and cons.

Key takeaways

  • Consolidating or refinancing high-interest private student loans into a single loan with another private lender can lower your monthly payments.
  • Student loan payments, including principal and interest, have been automatically suspended on federally owned student loans through September 30, 2021.
  • If you have federal student loans, another option may be to consolidate them through the government’s Direct Loan Program.
  • If you consolidate federal loans into a private loan, you will lose some of the special benefits that federal loans offer.

Federal student loan payments, including principal and interest, have been automatically suspended until September 30, 2021.

Additionally, the Department of Education stopped the collection of delinquent federal student loans or delinquent loans. Wage garnishment and any compensation for tax refunds and Social Security benefits were also suspended until September 30, 2021.

The suspension of the loan payment began as part of the response to the pandemic in March 2020 and was instituted by President Trump and the Department of Education. The suspension extension does not apply to private student loans and expires September 30, 2021.

How does student loan consolidation work?

There are two basic ways to consolidate your student loans: through a private lender or through the federal government. Only federal loans are eligible for federal consolidation.

In the case of a private student loan consolidation (often called a refinance), a private lender, such as a bank, repays your private or federal student loans and issues you a new loan at a new rate and with a new payment schedule. . Refinancing makes more sense if you have high-interest private loans and can get a significantly lower rate or better terms on the new loan.

However, with federal student loans, you have another option, which is to combine them into a new direct consolidation loan, through the Federal Direct Loan Program. Your new interest rate will be the weighted average of your previous loans and you will still be eligible for some of the special features of federal loans, as we will explain later.

While you cannot consolidate private loans into a federal loan, if you have both private and federal loans, you can consolidate the private ones with a private lender and consolidate the federal ones through the government program.

Here are the top pros and cons of both private and federal loan consolidations.

Pros and Cons of Student Loan Consolidation


  • Lower monthly payments

  • May release a co-signer from the loan

  • You will have to make fewer monthly payments

  • Payment terms can be flexible


  • You could pay more in the long run

  • You could lose the benefits of a federal loan

  • Any existing grace period can disappear

Advantage: lower monthly payments

Private loan consolidation can help lower your monthly loan payments in two ways. First, the refinanced loan can have a better interest rate, which not only means lower payments, but can also save you money over the life of the loan. Many graduates also find that they can get better interest rates because their credit scores have improved since they first applied for a loan.

Another way that a private consolidation or refinance can lower your monthly payments is by extending the life of your loan. For example, if you refinance a 10-year student loan into a 20-year loan, you will see a drastic reduction in your monthly payments. But signing up for a longer loan also comes with a big caveat, as we explain in the next Con.

In the case of federal loan consolidation, you may be able to lower your monthly payments if you qualify for one of the government’s income-based payment plans. These plans set your monthly payments based on how much you earn or how much you can afford.

Con: could pay more in the long run

While a longer-term loan may mean lower monthly payments, you could end up paying tens of thousands of dollars more over the life of the loan due to accrued interest.

Advantage: can release a cosigner of the loan

Another benefit of refinancing your private loans is that you may be eligible to sign the loan on your own. Leaving a co-signer, usually a parent or other close relative, not only frees them from their debt, but can also increase their credit score and allow them to access new lines of credit if they need it. Federal loans do not typically involve cosigners.

Con: You could lose the benefits of a federal loan

If you consolidate a federal student loan with a private lender, you will lose the option to enroll in an income-based repayment plan. You will also no longer be eligible for federal loan forgiveness and cancellation programs. These are the main reasons to consolidate your federal loans only through the federal program.

If your student loan is still within its grace period, wait until it ends before refinancing it.

Advantage: you will have to make fewer monthly payments

Keeping track of multiple student loan payments, in addition to all your other bills, can be a hassle. Consolidation will reduce your student loan bills to just one (or two, if you consolidate your private and federal loans separately, as is advisable). Many private lenders even offer a slightly lower interest rate if you enroll in an automatic payment plan. This option allows you to save a small amount of money each month and helps you avoid forgetting a payment.

Disadvantage: Any existing grace period can disappear

As soon as you get a loan refinanced with a private lender, you need to start repaying it. With many student loans, you can delay payments while you are still in school or if you have entered a graduate program. If your current loan is still within its grace period, wait until that period ends before beginning the refinancing process.

Advantage: payment terms can be flexible

When you consolidate your loans with a private lender, you can choose how long you want the loan to last and whether it has a fixed or variable rate. Choosing a variable rate can be riskier, as rates can go up at any time, but it can also offer you a lower interest rate at the beginning of the loan. Federal consolidation loans have a fixed interest rate.

How to Consolidate Student Loans

You can consolidate your student loans through many financial institutions, including your local bank or credit union, as well as lenders who specialize in these types of loans. Known names in the field include I laughed, LendKey, Y SoFi.

You can find more information about the steps to consolidate your federal loans at Federal Student Aid Website.

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Mark Holland

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