How to consolidate student loans

If you’re struggling to manage multiple student loan payments, consolidating your loans can leave you with just one payment to keep track of — and it could potentially help you save on interest.

The process for consolidating varies depending on whether your loans are federal or private. Before you move forward, it’s important to understand how consolidation works, as well as the pros and cons.

How to consolidate federal student loans

If you have federal student loans, you can consolidate them into a federal Direct Consolidation Loan. Your interest rate will be a weighted average of the interest rates of the loans you’re consolidating, so it may or may not be lower. These are the steps you’ll take to consolidate federal student loans:

1. Choose the loans you want to consolidate. You don't have to consolidate all your student loans into a Direct Consolidation Loan. Certain types of federal student loans (like Perkins loans) lose forgiveness benefits when you consolidate, so you may not want to consolidate them into your new loan.
2. Pick a repayment plan. One benefit of consolidating federal student loans is that you can choose an income-driven repayment plan, which bases your monthly payment amount on your income and family size. Take some time to consider your options and once you choose a repayment plan, you can move on to the next step.
3. Apply for the Direct Consolidation Loan. You can apply for a Direct Consolidation Loan on the StudentAid.gov website. It takes about 30 minutes to submit the application, and you have to do it in one sitting. You can view a sample of the application in advance so you know what information and documentation you need to have ready.

Requirements to consolidate federal student loans

Certain requirements have to be met to consolidate federal student loans:

• Eligible loans — Only federal student loans are eligible. An existing consolidation loan can’t be consolidated.
• Eligibility — No credit is check required, but your loans must be in repayment or in the grace period.

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When you should consider consolidating federal student loans

Federal student loan refinancing is an irreversible process, so make sure that consolidating your federal student loans into a Direct Consolidation Loan is the right choice before you move forward.

Consolidating your federal student loans could make sense if:

• You want a lower monthly payment. While having a lower monthly payment may make sense for your financial situation, keep in mind that repayment of the loan may take longer. In some cases, consolidation might raise your repayment term from 10 years to 20 years.
• You want a new interest rate. A new interest rate could be lower than the one you have now, but consider that the new rate will be a weighted average based on your loan amounts and interest rates. This means it could actually end up being higher. Your new interest rate is fixed and won’t change over the life of the loan.

How to consolidate (refinance) private student loans

Now let’s look at how to consolidate private student loans (which is also referred to as refinancing). When you consolidate federal or private student loans into a new private loan, you’re essentially refinancing multiple loans into one new loan. These are the steps you’ll typically take to consolidate student loan debt with a private lender:

1. Review your credit score. You may want to wait to refinance until you’re happy with your credit score. The higher your credit score, the better rates and terms you’ll likely qualify for. Getting a lower interest rate when you consolidate can help you save a lot of money. Check your credit score and see what types of interest rates lenders are currently offering for scores in that range.
2. Shop around. Take some time to prequalify with different lenders so you can have multiple offers to compare and contrast. That way, you can choose the one that will save you the most money.
3. Accept a prequalification offer. Once you get prequalification offers from a few lenders, choose the one that works best for you.
4. Apply. Once you know which lender you want to officially apply with, submit your application. Get ready to provide important documentation, like W-2s, pay stubs, and tax forms.
5. Pick repayment terms. You can choose how long you need to repay your loans. Longer loan terms will come with smaller monthly payments, but you’ll pay much more interest over the life of the loan than if you pick a shorter loan term.
6. Continue making payments on your existing loans. Until you receive confirmation that the new lender has paid off your loans, it’s important to continue making payments on your existing loans. Otherwise, it could negatively affect your credit score if you accidentally miss a payment.

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Requirements to consolidate private student loans

Private student loan lenders may have slightly different requirements for consolidation, but you can generally expect to run into the following requirements:

• Eligible loans — Private student loans, federal student loans, or a mix of both
• Eligibility — Varies by lender, but credit history and income count

When you should consider consolidating private student loans

If you’re not sure if consolidating private student loans is an option you want to pursue, here are a few reasons why it could be the right time to refinance:

• You want more flexibility. Consolidating offers a fresh slate of sorts and a chance to choose a new repayment period and monthly payment amount that’s more manageable for you.
• You can secure a lower interest rate. The main benefit of student loan refinancing is the potential to save money on interest. If you can get a lower interest rate by consolidating, you can save money on interest and it’ll be easier to pay your debt down faster. The higher your credit score is, the lower your interest rate will likely be.