How to Consolidate Student Loans

Quick Answer

Student loan borrowers can consolidate their student loans with the federal government or a private lender depending on the loan type and other factors. Consolidation may make student loan payments more manageable and possibly save you money.

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Consolidating your student loans can help streamline multiple loans into one monthly payment, lower your interest rate, extend your repayment term and more. With federal student loan payments slated to restart in September 2022 and student loan refinance rates on the rise, here's what you need to know about consolidating your student loans and how to do it.

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 to one and extend your repayment.

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: With refinancing, you can obtain a lower interest rate than what you're paying right now if you have good enough credit or a cosigner whose credit is in good shape. With federal consolidation, there's no way to lower your interest rate. In fact, your new rate will be the weighted average of your existing loans' interest rates, rounded up to the nearest one-eighth of a percent. Also, while the federal government only offers fixed rates, private lenders may offer both fixed and variable rates.
  • 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 20 years.
  • Access to federal benefits: If you want to maintain access to student loan forgiveness programs, payment pauses 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.

Should You Refinance Your Federal Student Loans?

Once you refinance federal student loans, you can't reverse the process, so it's crucial that you know for certain that it's the right decision for you. Here are some things to consider:

  • You'll lose access to student loan forgiveness programs and income-driven repayment plans when you move to a private lender.
  • You won't be eligible for the federal student loan payment pause if it gets extended again or potentially up to $10,000 in widespread loan forgiveness, which the Biden administration has discussed.
  • Deferment and forbearance options from private lenders can vary and typically aren't as generous as the programs offered by the federal government.
  • If you switch from a fixed interest rate to a variable interest rate, which some private lenders offer, it could increase your interest costs over time.
  • There's no guarantee that you'll get approved or receive a low enough interest rate to make refinancing worth it.

All that said, there are some situations where it might make sense to refinance your federal loans:

  • You have excellent credit and can qualify for the lowest rates private lenders have to offer.
  • You don't qualify for existing student loan forgiveness programs.
  • Your debt burden is large enough that the interest savings you gain from refinancing outweigh the potential offer of widespread loan forgiveness.
  • You have high income and savings and don't anticipate needing an income-driven repayment plan.

As with any major financial decision, take your time to carefully consider both the benefits and drawbacks to make the right decision for you.

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. You can check your Experian credit score for free, and if it's not in the good to excellent range, explore cosigner options or consider working to improve 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 score, 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 20 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 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 be a few more days 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. Consider consolidating only your non-Perkins loans.
  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, and you can ask the government to put you on the plan with the lowest monthly payment if you're not sure which to choose.
  3. Submit your application. You'll need to complete the application online in a single sitting—it generally takes about 30 minutes. View a sample version of the application in advance to make sure you have all documents ready beforehand.

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 FICO® Score .

If you're applying for private loan consolidation, the application process for private consolidation may initially have a negative impact on your credit score because of the hard inquiry. According to FICO, though, one additional hard inquiry typically knocks fewer than five points off your score.

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 are 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.

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 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.

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