Private student loan consolidation: How does it work?

Student loan consolidation is the process of combining multiple student loans, with different rates and repayment terms, into one loan with a single monthly payment. Consolidating private student debt has proven to be beneficial for many. In fact, USA Today reported that nearly 70% of borrowers who consolidated their private student loans said they were able to improve their financial situation. 

Here’s what you need to know about private student loan consolidation and whether it’s the right move for you. 

Federal vs. private student loan consolidation

Private student loan consolidation is very different from federal student loan consolidation, and it’s important to understand their differences before making this financial decision

• Federal student loan consolidation: If you have multiple federal student loans, you may be able to consolidate them using a Direct Consolidation Loan issued by the Department of Education. This type of loan merges multiple federal loans into one, allowing you to simplify repayment. If you’re a federal borrower with loans other than Direct Loans, consolidation can grant you access to income-driven repayment plans and other forgiveness programs.
• Private student loan consolidation : This process, commonly referred to as private student loan refinancing, involves taking out a new private loan to pay off all of the different loans you want to consolidate — federal or private. Through this process, you can change your interest rate, repayment timeline, and other loan terms. Not everyone will qualify for a lower interest rate than their current loans, though.

How does private student loan consolidation work?

The consolidation process for private loans involves applying for a refinance loan with a private lender. Your ability to qualify for a refinance loan will depend on your income and credit score, among other factors. If you can't qualify on your own, you may need to refinance with a cosigner.

Private lenders also typically offer a choice between a fixed interest rate or a variable interest rate for a refinance loan. Variable rates may start lower, but they're tied to a financial index and can fluctuate over time. Fixed rates provide more certainty, as your rate and payment will not change.

If you're approved for a refinance loan, the loan funds are used to pay off all the student loans you wish to consolidate. Once the process is complete, you can then begin making payments on the new loan. You'll have a choice of loan terms, with lenders typically offering repayment timelines between five and 25 years.

If you're able to reduce your rate or extend your repayment period, your monthly payments should be lower. Just remember that extending the timeline to repay your debt often means you'll pay more in interest over the life of the loan.

Pros and cons of private student loan consolidation

Pros 

• Potentially save money: Borrowers who qualify for a refinance loan with a lower interest rate, can reduce the amount paid in interest over the life of your loan. 
• Simplify repayment: By combining multiple loans into one single loan,, you have only one monthly payment to manage.
• Lower your monthly payment: If you need to free up room in your monthly budget, consolidating private loans can offer relief by extending your repayment timeline.
• Release a cosigner: You may be able to release a cosigner from their financial obligation, which can help their credit score and financial liability. 

Cons

• You may end up in debt for longer: If you choose to extend your repayment timeline when consolidating, it’ll take you longer to become debt-free. 
• You might increase your total interest costs: Depending on the repayment length you choose on the new consolidated loan, more interest may accumulate over time. 
• You might face the risk of rising interest rates: If you consolidate with a variable-rate loan, your interest rate may fluctuate, potentially increasing your monthly payments and overall loan costs.

Should I consolidate my private student loans?

Consider consolidating your private student loans through a refinance loan in the following situations:

• You can qualify for a new refinance loan at a lower rate than your current loans.
• You're financially stable and can comfortably afford your new payments.
• You want to remove a cosigner from your loan and you can qualify for a refinance loan on your own.
• You have several private student loans and want to simplify repayment by combining them into one monthly payment.

Related: Should I refinance my student loans?

How to consolidate private student loans

To consolidate private student loans, you’ll need to take the following steps: 

1. Determine which loans to include: It's generally less risky to refinance private student loans vs. federal debt. Refinancing federal loans results in losing access to perks like federal forgiveness programs and income-driven repayment plans.
2. Compare lenders: It’s a good idea to prequalify with multiple lenders to compare quotes and see which one offers the best refinance terms and rates. Note that prequalifying won’t impact your credit. 
3. Select your rate and term: You can decide between a fixed-rate loan or a variable-rate loan, then choose a short or long payoff timeline. A shorter payoff term comes with higher monthly payments but lower total costs, while a loan with a longer payoff timeline will have lower monthly payments but higher overall costs.
4. Submit a loan application: Once you find the right lender, you must apply for a loan. You’ll generally need to provide information about your income and your current loans. If you can't qualify for a loan on your own, you’ll also need to submit your cosigner's information.
5. Sign the final paperwork: If you’re approved, you’ll also need to sign a promissory note, which is a legal document that asks you to formally agree to your refinance loan’s terms.
6. Wait for your current loans to be paid off: Your existing loans will be repaid and you will then owe your new lender. Be sure to keep making payments on your old loans until the process is finalized.

Related: Best Lenders To Refinance Student Loans of 2024