Student loan consolidation is one of the best ways to make your federal loan payments more manageable. That’s because it both simplifies your monthly payment and gives you the opportunity to extend your loan term — a move that could dramatically reduce your monthly bill, make it easier to stay on top of your debt, and even help you qualify for some types of student loan forgiveness. 

So, what is federal student loan consolidation? And how is it different from private student loan refinancing¹? Here’s what you need to know.

What is student loan consolidation?

The term “student loan consolidation” usually refers to federal loan consolidation, a U.S. government program that allows borrowers to combine multiple federal education loans into a single new loan. Note that this is different from refinancing — even though refinancing is sometimes called “private student loan consolidation.” 

For the purposes of this article, “consolidation” will always mean federal consolidation, and “refinancing” will always refer to the process of combining loans through a private lender. (More on refinancing later.) 

Federal student loan consolidation is a great way to simplify and streamline your monthly bill. It can also give you the opportunity to change your loan term, choose a different loan servicer, and sign up for federal programs like income-driven repayment plans. 

If you choose to extend your loan term during the consolidation process, your new loan could have a lower monthly payment. However, you’ll still have a similar interest rate: with federal loan consolidation, your new rate is just a weighted average of your original rates.

How does student loan consolidation work? 

When you consolidate your student loans, the U.S. Department of Education pays off all your existing loans for you. Here’s how the process works.

1. You decide which loans you want to consolidate. With federal consolidation, you can elect to consolidate all your federal loans at once, or pick and choose. So, if you have some loans with unique benefits — like a Perkins Loan you think you could get forgiven — you can leave those out
   
2. The government reviews your application. After you submit your Direct Consolidation Loan application, the Department of Education reviews your personal finance details and calls your references. It’ll then let you know if you’re approved.
3. The government pays off your new loans. Next, the government works with your old loan servicers to pay off your current loans. It then issues a new Direct Consolidation Loan in their stead. Your new loan amount will be a sum of all your previous debts. You’ll pay off this loan balance in a series of monthly installments until the end of your new loan term.

Student loan consolidation: pros and cons

Before you consolidate your loans, be sure to weigh the benefits and drawbacks.

Pros of student loan consolidation

• Simplify your bills. With a single loan to worry about, your monthly payments will be simpler and easier to manage.
• Reduce monthly payments. Consolidation can lower your monthly bill by extending your repayment term and spreading out your payments over a longer period of time.
• Gain eligibility for income-driven repayment. Consolidating certain federal loans — like Parent PLUS Loans — can make them eligible for income-driven repayment (IDR) plans. If you make a certain number of on-time payments under one of these plans, you could have the rest of your debt forgiven.
• Work with a new loan servicer. Student loan consolidation lets you choose a new loan servicer — a big bonus if you’re not happy with your current servicer.
• Maintain eligibility for student loan protections. These include hardship options like deferment, forbearance, and income-driven repayment plans, as well as forgiveness programs like PSLF and Perkins Loan cancellation. 
• Get out of default. If you’ve defaulted on a loan, federal loan consolidation can provide one avenue to getting back on track.

Cons of student loan consolidation

• You could pay more. If you extend your repayment term, you’ll likely pay more in interest over the life of the loan.
• Your principal could increase. When you consolidate, any unpaid interest on your individual loans becomes part of the principal of the new, consolidated loan. That leaves you with a bigger balance to pay interest on.
• You might lose credit toward forgiveness. Consolidating could reset any progress you’ve made toward loan forgiveness plans like PSLF.
• You can’t get a lower interest rate. Your new interest rate will be a weighted average of the interest rates on your current loans.
• You could lose your FFEL rate reduction. Borrowers with loans through the Federal Family Education Loan (FFEL) program can qualify for interest rate reductions. But consolidating FFEL loans turns them into Direct Consolidation Loans — which means forfeiting that rate reduction benefit. 
  

How do I begin the student loan consolidation process?

You can apply to consolidate your federal loans online through the Department of Education.

1. Start your loan application. Log into your studentaid.gov account to begin the application for a Direct Consolidation Loan. Among other things, the application will ask about your current loans, employment status, any current grace periods, and your preferred loan repayment plan.
2. Pick your plan. First, choose the loans you want to consolidate. Then, use the Department of Education’s Loan Simulator tool to help you compare plans before you choose one. (You can also try Earnest’s Student Loan Manager² to find out which plans best fit your financial situation.)
3. Continue making payments. Student loan consolidation can take up to eight weeks. During this time, continue making payments on your old loans until you’re told your consolidation is complete.

Alternatives to student loan consolidation

Student loan consolidation isn’t for everyone. In some cases, you’re better off exploring other solutions. Here are a few common ways to better manage your student loans:  

1. Deferment: If you’re between jobs, going back to school, or dealing with financial or medical hardship, you might be able to hit pause on your federal student loans by applying for student loan deferment.
2. Forbearance: Student loan forbearance is similar to deferment, except you’ll have to pay all the interest that accrues during the forbearance period. You also can’t get forbearance for more than a year at a time.
3. Income-driven repayment plans: If you can’t afford the monthly payment on your federal student loans, you may be able to apply for income-driven repayment plans without consolidating first.
4. Student loan settlement: If you default on your loans, you can try contacting your servicer to negotiate new terms of payment.
5. Keeping your current plan: If you don’t qualify for student loan consolidation, don’t want to extend your repayment term, or don’t want to lose the benefits of certain federal loans, it might make sense to stick with your current plan. You can always work toward improving your financial situation and qualifying for refinancing later.
6. Student loan refinancing: Student loan refinancing is similar to consolidation, but it’s done through a private lender. It can help you not only lump your loans into one simple monthly payment but potentially save thousands of dollars over the life of your loan³. 

What is student loan refinancing? 

Student loan refinancing is the process of combining your old loans into a single new loan under a private lender. Unlike consolidation, refinancing gives you the opportunity to secure a lower interest rate, which could help you save up to thousands of dollars over the life of your loan. You can choose to refinance private loans, federal loans, or a mix of both.

With refinancing, a private lender pays off all your old loans for you. These loans effectively disappear. The lender will then issue a new refinance loan to replace your old debts. This new loan will have a single monthly payment and new loan terms. If you have excellent credit, you may also be able to qualify for a dramatically lower rate.

The pros and cons of student loan refinancing

Think student loan refinancing may be a better option for you? Consider these pros and cons.

Pros of student loan refinancing

• Potential for lower interest rates: Refinancing allows you to potentially secure a lower interest rate, which could save you thousands of dollars over the life of your loan.
• Simplified student loan repayment: If you have multiple loans, refinancing can lump them into a single loan with one monthly payment, making it easier to manage your debt and avoid missing payments.
• Lower monthly payments: By securing a lower interest rate or extending your repayment term, refinancing can reduce your monthly payment amount, which can provide extra room in your budget.
• Pay off debt sooner: If you secure a lower interest rate and choose to maintain or increase your monthly payment, you may be able to pay off your debt faster, saving you both time and money.

Cons of student loan refinancing

• Loss of federal benefits: If you have federal student loans and choose to refinance them with a private lender, you will lose certain federal benefits such as income-driven repayment plans, loan forgiveness programs, and potentially deferment or forbearance options (these vary by lender). Make sure to weigh the benefits against the potential loss before refinancing federal loans.
• Creditworthiness and eligibility: To qualify for refinancing, you typically need a good credit score and a steady income. If your credit score has not improved since you borrowed your original loans, or if your income is not sufficient, you may not be eligible for favorable refinancing terms.
• Variable vs. fixed interest rates: Some refinancing companies may offer variable interest rates. These may initially be lower but can increase over time. If you prefer the stability of a fixed-rate loan, make sure to carefully consider the terms offered by different lenders.
• Loss of loan protections: Federal student loans offer certain protections, like loan forgiveness in specific circumstances or discharge upon death. Private lenders may not provide the same level of protection, so it’s essential to understand the terms and protections offered by the refinancing lender.
• You could pay more in interest: If you extend your repayment period to get lower monthly payments, you could end up paying more in interest over the life of your loan.

Everyone’s financial situation is unique, so it’s important to evaluate your specific circumstances before you refinance your student loans. Consider factors like your creditworthiness, existing federal benefits, and long-term financial goals.  

Student loan consolidation vs. refinancing: Which is right for me?

Student loan refinancing may be better for you if…

1. Your student loans are from private lending companies, or you have a mix of private loans and federal student aid.
2. You aren’t serving in the military, working as a teacher, or working a nonprofit or government job that could qualify you for federal loan forgiveness programs.
3. You don’t expect to apply for forbearance or deferment for your federal student aid.
4. You have a good credit score 
5. You have a steady income and good financial footing.

Federal student loan consolidation could be better for you if…

1. You only have federal student loans.
2. You work for a government organization or nonprofit and qualify for Public Service Loan Forgiveness or other federal forgiveness programs.
3. You can’t afford your current monthly payment and think you might qualify for income-driven repayment options.
4. You don’t have a stellar credit score or a stable job situation.
5. You’re in student loan default and want a faster alternative to loan rehabilitation.

How do I begin the student loan refinancing process?

The first step to refinancing your student loans is researching your options.

1. Shop around to get rate estimates. Different private lenders offer different interest rates and terms. To see what each can offer, apply for pre-qualification for as many servicers as you can. (Pre-qualifications use what’s called a “soft credit pull,” which doesn’t hurt your credit score.)
2. Compare annual percentage rates. Comparing annual percentage rates, or APRs, is the best way to compare refinancing offers. That’s because the APR includes the interest rate as well as other fees — giving you a more complete picture of the total cost of the loan. The lower the APR, the better.
   
3. Consider other perks. APR is important, but it isn’t everything. Some loan servicers offer a kind of signing bonus, called a “student loan refinance bonus,” to entice your business. Others let you choose your own repayment term. Before you pick a private lender to refinance with, look at all these factors. Then, use a student loan refinance calculator to make sure you’re saving the most money possible over the lifetime of your loan.
4. Complete your application. When you’ve settled on a lender, apply for approval. During this step, the lender will perform a credit check. Among other things, they’ll analyze your credit history and score to determine whether you’ll be a responsible borrower. Note that this is what’s called a “hard credit pull.” It can negatively impact your credit score, so only apply for one lender  if you can help it.

Get a free rate check from Earnest 

Student loan consolidation and refinancing may seem similar, but there are a few key differences. Consolidation is only available for federal loans. It can help you streamline your federal student loan payments and lower your monthly bill, but it can’t help you get a lower interest rate. 

On the other hand, student loan refinancing is available for both federal and private student loans, and it can help you lower your interest rate and new terms, which can save you thousands of dollars over the life of your loans.

At Earnest, we know managing your student loans isn’t always easy. That’s why we give all federal borrowers access to our Student Loan Manager, a tool that calculates the best federal repayment plan for your needs. 

If ultimately you choose to refinance, we can help with that too. Earnest never charges origination fees or prepayment penalties, and we offer low rates, no fees, a 9-month grace period⁴, and some of the best customer service in the business. See what you could be eligible for with a free rate check. It only takes two minutes, and it won’t affect your credit score.