If you have federal student loans, there is a good chance you’ve heard the word “consolidation” before. Consolidation differs from refinancing in a few important ways, but there’s often confusion about how. Understanding the difference is your first step in determining if consolidation is right for you. The next is figuring out if you should consolidate your federal student loans. And if you decide to move forward, you’ll want to learn about the loan consolidation process.
Here’s what to know when deciding between loan consolidation and refinancing, how to to evaluate your choices, and what the process looks like.
What’s the difference between student loan consolidation and student loan refinancing?
Student loan consolidation is not the same as student loan refinancing. Consolidation simply means combining multiple federal loans into one loan. It helps you streamline the loan repayment process by giving you one bill to pay each month instead of several bills to keep track of. Generally, when you consolidate your loans through the Department of Education, you end up with a slightly higher interest rate. (We’ll discuss how rates are calculated shortly.)
Refinancing also consolidates your loans into one monthly payment, but people often refinance their loans to get a lower interest rate. Private lenders offer refinancing, and while you can refinance your federal loans with a private lender, the Department of Education doesn’t offer this option.
Should you consolidate your federal student loans?
There are several factors to consider if you’re thinking about loan consolidation. First, keep in mind that if you have private student loans, you cannot consolidate those loans through the government. Instead, your best option is student loan refinancing if you want to streamline your monthly payments or change your loan terms or rates.
If you have federal student loans, here’s what to keep in mind when considering whether to consolidate:
- In order to qualify for federal student loan consolidation, your loans must be in repayment or in the grace period. This typically happens when you graduate, attend school part-time, or leave school.
- Consolidating student loans will mean you have just one bill to pay, rather than multiple bills. This can make it easier to track your finances, and it reduces your risk of missing a payment or paying a late fee.
- Consolidating impacts your interest rate—and not in a good way. When you consolidate, the federal government takes the midpoint between the highest and lowest interest rates from your individual loans and rounds up to the nearest one-eighth of a percent. This new weighted average is what you’ll pay on your consolidated loan.
- Consolidating student debt might help you streamline your monthly payments, but it probably won’t save you money in the long run. In fact, you are likely to pay more in interest because the life of your loan is extended. Additionally, since the life of the loan is extended you are stuck with student loan debt longer. For some people, this mental burden can be a huge negative.
- Federal student loan consolidation still allows you to be eligible for certain programs, including income-driven repayment (IDR) plans, deferments, forbearances, and student loan forgiveness through Public Service Loan Forgiveness (PSLF).
- If you’re currently repaying your loans under an IDR plan or if you’ve already made payments towards PSLF, you may have to start over with the number of payments you need to make. It’s important to note that you don’t need to consolidate all your loans; instead, you can choose which loans you want to consolidate.
- Once your loans are consolidated, you can’t go back. So it’s to your benefit to do your research before completing the application.
Can you get a better rate by consolidating federal student loans?
As mentioned, consolidating with a Direct Consolidation Loan will likely increase your federal student loan rate slightly. If your goal is to save money on interest in the long run, refinancing your student loans with a private lender is another option. Taking this step could reduce your rate, depending on the current interest rate environment.
Just remember that refinancing with a private lender will remove your federal student loan benefits, such as the potential for loan forgiveness through PSLF. Consider your goals and potential drawbacks of refinancing before moving forward.
How to Consolidate Federal Student Loans
The federal student loan consolidation process is rather straightforward and easy. There is no fee to consolidate. If you feel that consolidation is the right choice, here are the steps to take:
- Gather information about all your student loans and decide which to consolidate. Once you’ve narrowed it down, you’ll need to know your loan servicers, account numbers, and payoff amounts.
- Visit the Federal Student Aid website, and complete a Direct Consolidation Loan Application. You’ll be prompted to log into your account.
- Expect the application process to take around 30 minutes. You can save your draft application and come back to it later, if needed.
Staying informed about your student loan options is key
Unfortunately, ignoring your student loans won’t make them disappear. Regardless of whether you decide to refinance student loans or consolidate them, staying informed about your options and engaging with trusted resources (such as an ELFI Loan Advisor) can help you take control of your finances and stress less about your student loans.
