Pros and cons of consolidating your student loans

When you have multiple student loans to manage, a monthly payment could easily slip through the cracks. Consolidating your student loans can help simplify your student loan repayment by giving you just one monthly payment to manage.

But consolidation means something different depending on whether you have federal student loans, private student loans, or a combination of the two.

Before you consolidate your student debt, it’s important to consider the pros and cons of student loan consolidation.

• What’s the difference between consolidation and refinancing?
• Pros of federal student loan consolidation
• Cons of federal student loan consolidation
• Pros of private student loan refinancing
• Cons of private student loan refinancing
• How to apply for loan consolidation or refinancing

What’s the difference between consolidation and refinancing?

Consolidation and refinancing are two terms that are sometimes used interchangeably. But when student debt is being discussed, consolidation typically applies to federal loans while refinancing applies to private student loans.

• Direct Consolidation Loan — If you have multiple federal student loans, you can combine them into a Direct Consolidation loan that makes paying off debt more manageable while giving you access to flexible repayment terms and loan forgiveness options. Federal loan consolidation may not reduce your interest rate — your new rate will be the weighted average of the rates on your existing loans — but it will give you just one monthly payment to keep track of.
• Private student loan refinancing — If you have private student loans, federal student loans, or both, you can consolidate them by refinancing into a new private student loan that will pay off your existing loans. If you have good credit, refinancing may give you better loan terms or a lower interest rate, which could save you money and help you pay off debt faster.

You can refinance both private and federal student loans, but you should be careful when making the decision to refinance federal loans into a private loan. You’ll lose federal benefits and protections like income-driven repayment plans, loan forgiveness options, deferment, and forbearance.

If you’re working toward federal loan forgiveness or have unstable income, it could be better to stay with your federal student loans because they have more payment relief options to fall back on. Private lenders may offer some borrower benefits as well, but those benefits vary and may not be as expansive as federal loan benefits.

Pros of federal student loan consolidation

A federal Direct Consolidation Loan lets you consolidate multiple federal loans into a new, single loan. Direct Consolidation Loans come with several benefits to consider, including:

• Applying is easy. You can apply for the consolidation online or with a paper application, and you can usually complete the application in less than 30 minutes.
• You can simplify loan repayment. A Direct Consolidation Loan gives you fewer payments to manage, which can make it easier to keep track of your payment due date and make your loan payments on time.
• Get loans out of default. If you have federal loans in default, consolidating your loans could bring your loans back into good standing so you can qualify for borrower benefits again, such as deferment and forbearance.
• Choose flexible repayment options. Repayment terms go up to 30 years, and choosing a longer loan term may lower your monthly payments. Direct Consolidation Loans may also qualify for income-driven repayment (IDR) plans that set your monthly payment at 10% to 20% of your discretionary income.

Cons of federal student loan consolidation

Consolidating your debt with a Direct Consolidation Loan has some downsides to consider as well, including:

• Extending the loan term can affect your budget for years. Choosing a longer loan term might lower your monthly payment, but it could result in you paying more interest over time. Plus, having student loan debt stick around for decades could affect your ability to reach other financial goals.
• Rules apply when consolidating defaulted loans. To consolidate loans in default, you either have to make three consecutive on-time payments on those loans first, or you have to sign up for an income-driven repayment plan.
• Unpaid interest on existing loans will capitalize. If you have unpaid interest on your federal loans, that interest will be rolled into your new consolidation loan balance, and interest will be charged on that higher balance.
• You may lose credit for payments you’ve made toward loan forgiveness. If you’re already on an IDR plan, payments you’ve made toward loan forgiveness won’t count when you consolidate to a new loan, so you’ll have to start again from scratch. Previously, payments made toward Public Service Loan Forgiveness (PSLF) also wouldn’t count after you consolidated. But under temporary relief as a result of the COVID-19 pandemic, you can continue to receive credit for past payments toward PSLF for a limited time even after you consolidate. COVID-19 payment relief measures have been extended until Aug. 31, 2022.

Pros of private student loan refinancing

You can’t consolidate private student loans into a Direct Consolidation Loan. But private student loan refinancing (sometimes called a private student loan consolidation) is an option to make repayment more manageable. These are some pros of private student loan refinancing:

• Simplify payments. Private student loan refinancing can combine many student loan payments into one monthly payment.
• Lower your interest rate. If you have good credit, you may be able to refinance your private student loans into a loan with a lower interest rate, which could help you pay off debt faster.
• Remove a cosigner. Refinancing your loans could help you release a parent or relative who agreed to cosign for your original student loan.

Cons of private student loan refinancing

Before refinancing student loans, consider some of the drawbacks:

• You typically need good credit. You generally need good credit to qualify for student loan refinancing. Good to excellent credit will also net you the best rates. That said, if you have limited credit or no credit, you may be able to qualify for student loan refinancing with a cosigner.
• Payment relief may not be available. Private lenders may not offer benefits like forbearance or deferment if you face hard times. Check with the lender for applying to see if it offers any payment relief options.
• You may not qualify if you have high debt balances. You’ll likely need a debt-to-income (DTI) ratio of 50% or less to be eligible for a refinance. DTI is a ratio that shows what percentage of your income goes to debt payments each month. If a large portion of your income goes to credit card and loan payments, you may not qualify for refinancing. You can calculate DTI by adding up all your monthly debt payments, dividing that total by your gross monthly income, and multiplying by 100.

How to apply for loan consolidation or refinancing

The application process will vary slightly depending on your lender, and whether you’re consolidating federal loans or refinancing private loans.

How to apply for federal loan consolidation

You can apply for a federal Direct Consolidation Loan by visiting StudentAid.gov. The application lets you choose the loans you want to consolidate and select repayment options.

Your loan servicer will take care of the consolidation from there, and you should continue making payments on your old loans until you get confirmation that they’ve been paid off.

SHOULD I REFINANCE MY STUDENT LOANS?

How to apply for private student loan refinancing

To refinance your student loans, you need to shop around with private lenders to compare rates and submit an application. The application process will likely involve a credit check, and your interest rate will be set based on your credit history.

Having good credit can help you land competitive interest rates and long-term savings. Shopping around and getting rate quotes can help you find the best loan you can qualify for based on your credit profile.