How Student Loan Consolidation Works

What Is Student Loan Consolidation?

Student loan consolidation is the process of combining multiple student loans into one new loan with a single monthly payment. Instead of keeping track of several balances, interest rates and due dates, consolidation simplifies repayment under one lender and one interest rate.

Consolidation can also reset your repayment timeline, potentially lowering your monthly payment by extending your loan term. While this makes repayment more affordable in the short term, it can increase the total amount of interest you pay over time.

Still, for borrowers juggling several loans, consolidation can offer a cleaner, more organized path toward repayment.

Student Loan Consolidation vs. Refinancing

There are two types of student loan consolidation: federal and private. In general, though, private loan consolidation is referred to as refinancing.

With federal consolidation, you keep your student loans with the federal government, but you can switch to a new loan servicer, reduce the number of your monthly payments and extend your repayment period.

In contrast, private consolidation or refinancing involves replacing your federal or private student loans with a new one through a private lender. Here are other ways the two differ:

• Loan eligibility: Federal loan consolidation is only available to federal student loan borrowers. But you can refinance both federal and private student loans with a private lender.
• Borrower eligibility: You don't need to undergo a credit check when you apply for federal consolidation, but your eligibility with private refinancing will depend on your credit history, income and other factors.
• Interest rates: Refinancing can help you secure a lower rate if you have strong credit or a qualified cosigner. But federal consolidation doesn't reduce your rate—it simply combines your existing rates into a weighted average, rounded up to the nearest one-eighth of a percent. Also, while federal loans always have fixed rates, private lenders may offer both fixed and variable options.
• Repayment terms: If you consolidate with the Department of Education, you can choose a repayment term ranging from 10 to 30 years. Refinancing terms can vary by lender, but many offer between five and 25 years.
• Access to federal benefits: If you want to maintain access to student loan forgiveness programs, forbearance and deferment options, and other federal student loan benefits, federal consolidation is your best bet. If you refinance your federal loans with a private lender, you'll no longer be able to access those programs.

Learn more: Is It Better to Consolidate or Refinance Student Loans?

How to Consolidate Private Student Loans

You can refinance both federal and private student loans with a private lender. Before you take the first offer you see, though, it's important to take your time to set yourself up for the best deal possible:

1. Check your credit score. Register with Experian to get free access to your FICO^® Score^Θ. If it's not in the good to excellent range—generally a score of 670 or above—explore cosigner options or consider working to improve your credit before applying.
2. Compare rates. Many lenders offer the opportunity to prequalify for refinancing on their websites. They'll perform a soft inquiry, which won't affect your credit scores, and you can compare likely rates from multiple lenders before submitting a full application.
3. Choose your terms. Lenders generally offer multiple repayment terms, ranging from five to 25 years. Pick the shortest term your budget can handle, which will keep your interest payments to a minimum.
4. Gather necessary documents. Once you've chosen a lender you'd like to work with, collect the documents you'll typically need to submit with your application. These can include pay stubs, tax forms like your federal W-2 form, a photo ID and a payoff statement telling your new lender how much of your current loan balance it will need to pay off.
5. Submit your application and accept the terms. You'll typically apply online through the lender's website. The initial underwriting process may take a couple of days, though it may take longer if you need to provide additional documents. And if you have a cosigner, it can take even longer. Once you receive approval and a final offer, review the terms and sign the agreement electronically.
6. Keep making regular loan payments. During the refinancing process, continue paying your previous loans until your new lender confirms you can stop. That will help you avoid inadvertently missing a payment, which could hurt your credit score. You'll now make one payment per month to your new lender.

How to Consolidate Federal Student Loans

If you've decided to apply for a direct consolidation loan, you can do so online through the Federal Student Aid website. Here are the steps you'll follow:

1. Choose which loans to consolidate. You don't have to include all your federal loans in the new consolidation loan. Perkins loans, for instance, come with forgiveness benefits you'll lose if you consolidate them.
2. Choose a repayment plan. If you're consolidating to qualify for an income-driven repayment plan or Public Service Loan Forgiveness, pick a new repayment plan for your consolidation loan. To do so, you'll submit a separate income-driven repayment plan request form online. If you're not sure which one to choose, you can ask your loan servicer to put you on the plan with the lowest monthly payment.
3. Submit your application. You'll need to complete the application online in a single sitting—it generally takes about 30 minutes.

Pros and Cons of Consolidating Student Loans

Consolidating your student loans can offer significant benefits, but it's not the right choice for everyone. Before making a decision, carefully weigh the advantages against the potential drawbacks to determine if consolidation aligns with your financial goals.

Should I Consolidate My Student Loans?

Consolidating student loans can make sense if you're looking to simplify repayment, gain access to new federal programs or reduce your monthly payment. It's often a good option for borrowers with multiple federal loans who find managing different servicers and due dates overwhelming.

If your primary goal is to lower your interest rate, refinancing with a private lender may be worth exploring, especially if you have strong credit or a reliable cosigner. But keep in mind that refinancing with a private lender means losing federal protections, including income-driven repayment and forgiveness eligibility.

Ultimately, the right choice depends on your financial situation and goals. Take time to compare options, estimate potential savings and read the fine print before deciding which path best supports your long-term repayment strategy.

Learn more: How to Lower Student Loan Interest Rates

How Does Student Loan Consolidation Affect Credit?

If you use the federal loan consolidation program, there's no credit check, so you won't get a hard inquiry on your credit reports. Additionally, because you're just consolidating existing debt instead of taking on new debt, your amount owed won't be affected either.

However, the new loan account will impact your length of credit history, including the average age of your accounts, which can affect your credit scores.

If you're applying for private loan consolidation (refinancing), the application process may initially have a negative impact on your credit score because of the hard inquiry. Thankfully, though, one additional hard inquiry typically knocks fewer than five points off your score and the impact is temporary.

And as with federal consolidation, the new loan account will also impact your length of credit history. That said, none of these potential negative impacts is as important as your payment history, so as long as you continue to make your payments on time, you shouldn't see any major issues.

Learn more: What Affects Your Credit Scores?

Frequently Asked Questions

Continue to Monitor Your Credit After Consolidation

Regardless of which option you choose, it's important to continue to maintain good credit after you've completed the consolidation process.

Experian's free credit monitoring service offers free access to your FICO^® Score and Experian credit report and also provides real-time alerts when changes are made to your report, so you can understand how your actions impact your score and also act fast if something goes wrong.