Student Loan Consolidation: Federal and Private

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There are two types of student loan consolidation: federal and private. These processes are often confused, but they’re very different. Here’s how:

  • Federal student loan consolidation is a logistical move you do through the Department of Education. You may need to consolidate to be eligible for some federal loan repayment programs, but federal consolidation won’t lower your interest rate or save you money.
  • Private student loan consolidation, which is also called student loan refinancing, is a financial move you do through a private lender. If you qualify based on factors including your credit score, you can save money by getting a lower interest rate.


Federal student loan consolidation basics

How to consolidate federal student loans

Benefits of federal consolidation

Drawbacks of federal consolidation

Private student loan consolidation (student loan refinancing)

Federal student loan consolidation basics

When you consolidate federal loans, the government pays them off and replaces them with a direct consolidation loan. You’re generally eligible once you graduate, leave school or drop below half-time enrollment. Consolidating your federal loans through the Department of Education is free; steer clear of companies that charge fees to consolidate them for you.

When you consolidate federal loans, your new fixed interest rate will be the weighted average of your previous rates, rounded up to the next ⅛ of 1%. So, for instance: If the average comes to 6.15%, your new interest rate will be 6.25%.

Additionally, you’ll get a new loan term ranging from 10 to 30 years. Your repayment term will generally start within 60 days of when your consolidation loan is first disbursed and will be based on your total federal student loan balance, among other factors; click on the link below for more details.


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How to consolidate federal student loans

Applying for consolidation takes most borrowers less than 30 minutes, according to the Federal Student Aid website. As part of the process, you’ll need to provide details about your existing federal student loans, and choose a federal loan servicer and repayment plan for your new consolidation loan.

You have to complete the application in a single session, so do your research before you start. When you’re ready, follow these five steps to apply:

1. Go to and log in with your Federal Student Aid ID. You’ll find the application by clicking on “Complete a Consolidation Loan Application and Promissory Note” under the repayment and consolidation tab.

2. Select the federal loans you want to consolidate. You can consolidate all your federal loans or just some of them. If you’re a parent with PLUS loans and you also have other federal student loans, you may want to consolidate your PLUS loans in a separate consolidation loan; consolidating them with your other federal loans will make that consolidation loan ineligible for all income-driven repayment plans except income-contingent repayment. If you have Perkins loans, think twice before consolidating them; you’ll lose access to Perkins loan cancellation if you do.

3. Choose a student loan servicer. Federal loan servicers are private companies that manage federal loans for the Department of Education. You can choose one of four servicers for your new direct consolidation loan: FedLoan Servicing, Great Lakes Educational Loan Services Inc., Navient and Nelnet. If your loans are already with one of those servicers, you can stay or choose a new one.

4. Pick a repayment plan for your new consolidation loan. On the standard repayment plan for direct consolidation loans, you’ll make equal monthly payments for 10 to 30 years, depending on your total federal student loan balance. Alternatively, there are six other repayment plans to choose from, including four income-driven plans. To find the best plan for you, check out Federal Student Aid’s repayment estimator before you begin the consolidation application. The tool shows you how much you’d pay per month on the various plans.

If you choose an income-driven plan, you’ll be asked to provide income information on the application by granting access to your IRS tax information. You can opt out, but you’ll have to submit a copy of your most recent federal tax return directly to your loan servicer after you finish the consolidation application.

5. Complete and submit the application. The remainder of the application involves filling in basic personal information and providing names of two references who have known you for at least three years.

After you review, sign and submit your application, continue making payments on your existing federal loans until your application has been processed. If you have problems with or questions about any part of the application, you can call Federal Student Aid’s Loan Consolidation Information Call Center at 1-800-557-7392.

There are major benefits and drawbacks of federal consolidation; it’s important to understand both because consolidation can’t be undone.

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Benefits of federal student loan consolidation

You can access repayment plans and forgiveness programs you wouldn’t qualify for otherwise

Only federal loans in the Direct Loan Program qualify for Pay As You Earn, Revised Pay As You Earn, income-contingent repayment and Public Service Loan Forgiveness. If your loans are through the Federal Family Education Loan program, or FFEL, consolidating them with a direct consolidation loan will make you eligible for those programs.

Parent borrowers with PLUS loans — even those with direct PLUS loans — need to consolidate before they can be eligible for income-contingent repayment, which is the only income-driven plan parent PLUS loan borrowers are eligible for.

It’s one path out of default

Consolidating a federal student loan that’s in default will restore your eligibility for federal loan benefits including deferment, forbearance and loan forgiveness programs. If you’re consolidating for the purpose of recovering from default, you have to choose an income-driven repayment plan or make three consecutive, on-time, full monthly payments before you consolidate.

It may simplify your student loan payments

Particularly if you have multiple federal loan servicers, consolidating your federal student loans can make your life easier. Instead of paying multiple federal student loan bills each month, you’ll make one payment to one servicer.

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Drawbacks of federal student loan consolidation

You’ll likely end up paying more in interest

This could happen in a few ways. First, consolidating your federal loans will likely extend your repayment term. While this will lower your monthly payments, you’ll end up paying more in interest throughout the life of your loan.

Secondly, the interest rate on your consolidation loan may be slightly higher, because it will be the weighted average of your previous rates rounded up to the nearest ⅛ of 1%.

Finally, any unpaid interest on the loans you’re consolidating will be added to your principal balance. This is known as capitalization, and it increases the total amount of interest you pay because you end up paying interest on top of your interest.

Any progress you’ve made toward federal loan forgiveness will be erased

There are several ways to get federal student loan forgiveness, and most federal forgiveness programs require that you first make loan payments for a certain period of time. For instance, you have to make 120 full loan payments while working for the government or a nonprofit to earn forgiveness through the Public Service Loan Forgiveness program.

However, qualifying payments you made before consolidating will no longer count after you consolidate. For example, if you make 20 qualifying PSLF payments and then consolidate, you’ll have to start again and make 120 qualifying PSLF payments before qualifying for forgiveness.

You could lose access to certain repayment plans and forgiveness programs

If you have a parent PLUS loan and other types of federal loans, consider consolidating the other federal loans and the PLUS loans separately. If you consolidate them together, your consolidation loan will be ineligible for income-based repayment, Pay As You Earn and Revised Pay As You Earn, because parent PLUS loans are ineligible for those plans.

Additionally, if you have a Perkins loan, you’ll lose access to Perkins loan cancellation if you consolidate. Consider keeping those loans separate if you plan to take advantage of that program.

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Private student loan consolidation (student loan refinancing)

Private student loan consolidation, or refinancing, means replacing multiple student loans — private, federal or a combination of the two — with a single, new, private loan. You’ll save money if your new loan has a lower interest rate.

Your financial history — including your credit score, income, job history and educational background — will dictate your new interest rate when you refinance. You typically need a credit score at least in the mid-600s to qualify, and rates range from around 2% to more than 9%.

It’s important to note that when you refinance federal loans into a private loan, you’ll lose protections specific to federal loans. Those include interest-free deferment on subsidized federal loans, and access to income-driven repayment plans and federal loan forgiveness programs.

If you’re ready to get started, compare refinance lenders to make sure you’re getting the lowest possible rate. 

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Brianna McGurran and Teddy Nykiel are staff writers at NerdWallet, a personal finance website. Email: or Twitter: @briannamcscribe or @teddynykiel.