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.

This article covers:

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. Consolidating your federal loans through the Department of Education is free. If you see an ad, receive a letter, or get a phone call from a company that charges you a fee to consolidate, don’t respond. Consolidation can’t be undone, so it’s important to understand what you could give up when you pursue it.

The interest rate on your direct consolidation loan will be the weighted average of your previous rates, rounded up to the next 1/8 of 1%. It won’t be determined by your financial history, as it would be if you refinanced. Interest rates on direct loans are fixed, so your interest rate won’t change while you’re paying off the loan.

The government will assign you a new repayment schedule based on your total federal loan balance when you apply for consolidation; click on the link below for more details.

How to consolidate federal student loans

You can apply for a direct consolidation loan online at studentloans.gov. Log in with your Federal Student Aid ID and click on “Complete a Consolidation Loan Application and Promissory Note.” You’ll need to finish the application in one session, so set aside at least 30 minutes to fill it out.

If you have problems or questions at any point during the process, you can call Federal Student Aid’s Loan Consolidation Information Call Center at 1-800-557-7392.

As part of the consolidation application, you’ll need to choose a new repayment plan and federal loan servicer. Make sure you’ve decided each before you get started.

You can use Federal Student Aid’s Repayment Estimator tool to see how much you’d pay per month on each repayment plan. If you’re consolidating in order to switch to an income-driven plan, you’ll fill out an Income-Driven Repayment Plan Request when you apply.

You’ll have the option to pick either FedLoan Servicing, Great Lakes, Nelnet or Navient as your student loan servicer for your direct consolidation loan. If you already work with one of these servicers, it may be easier for you to choose that company so you don’t have to transfer all your loans to a new one. If you want to enroll in PSLF, you must choose FedLoanServicing.

Your direct consolidation loan goes into repayment within 60 days after your application has been processed. If you’re in your six-month, post-graduation grace period, though, you can request that your repayment term begin closer to the end of your grace period. Your servicer will let you know when your first payment is due and how to submit it.

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Benefits of federal student loan consolidation

  • It may allow you access to repayment plans you wouldn’t be eligible for otherwise. Consolidating some types of loans, like those from the Federal Family Education Loan Program, makes them eligible for certain benefits. These include income-driven repayment, which ties your loan payments to your earnings and forgives your federal loan balance after 20 or 25 years, and Public Service Loan Forgiveness, which dissolves your remaining balance after you make 120 monthly payments while working in a public service job.
  • It can be a way to simplify your monthly payments. If your federal loans are managed by a variety of loan servicers, or if you have to make multiple separate payments every month, consolidating them into one loan with a single monthly payment can help keep your loans in good standing, since you’re more likely to stay organized.

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Drawbacks of federal student loan consolidation

  • You’ll pay more in interest if you extend your repayment term. Since the government will give you a new loan term based on your balance, you might end up paying down your loans over a longer period of time than you planned to. And that means owing more in interest. Of course, you can always pay more toward your federal loans every month if you want to, penalty-free, so you get rid of them faster. Plus, consolidating large loan balances so you’ll qualify for forgiveness programs will save you money in the end.
  • You’ll lose forgiveness benefits when you consolidate Perkins loans. Consider keeping Perkins loans separate when you consolidate if you plan to take advantage of Perkins loan cancellation. Perkins loans offer loan cancellation for teachers who work in low-income areas and who teach certain subjects. Up to 100% of your Perkins loan could also be canceled if you work in law enforcement, as a nurse or in other public service jobs.

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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. One way to do so is through Credible, a student loan refinancing marketplace and NerdWallet partner. By clicking on the button below and answering a few questions on Credible, you can get rate estimates from multiple refinance lenders. Your credit score won’t be impacted unless you decide to apply for a loan with one of the lenders.

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Brianna McGurran is a staff writer at NerdWallet. Email: bmcgurran@nerdwallet.com. Twitter: @briannamcscribe.

Updated Feb. 13, 2017.