What You Need To Know Before Consolidating Federal AND Private Student Loans

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Learning how to consolidate student loans can make debt repayment a whole lot simpler. Instead of tracking multiple loans and payments, consolidating lets you pay back a single loan.

But there are two ways to consolidate student loans. The first involves borrowing a Direct Consolidation Loan from the Department of Education, and it only applies to federal student loans.

The second is student loan refinancing, which can include federal or private student loans. Let’s take a closer look at both types of consolidation so you can decide if either option is right for you.

How to consolidate student loans with a Direct consolidation loan

If you have federal student loans, you can consolidate them with a Direct Consolidation Loan. Most federal student loans are eligible, including Direct Subsidized Loans, Direct Unsubsidized Loans and PLUS Loans.

You can apply for a Direct Consolidation Loan for free at StudentLoans.gov. When you apply for federal student loan consolidation, you’ll also have the option to choose new repayment terms.

For example, you might choose a long term (up to 30 years) to lower monthly payments. Keep in mind, though, that extending your term means you’ll pay more interest over the long run.

You should also note that federal student loan consolidation causes your interest rate to go up slightly. When you consolidate, your new interest rate will be the weighted average of your old interest rate rounded up to the nearest one-eighth of 1%.

This small increase could be worth the cost, though, since federal student loan consolidation can seriously simplify repayment.

How to consolidate student loans through refinancing

Your second option for consolidating comes in the form of student loan refinancing. You can refinance private and/or federal student loans, and you’ll do so through a private lender.

Not only will refinancing combine multiple loans into one, but it could also lower your interest rate. If you have decent credit and a steady income — or can apply with a creditworthy cosigner — you could qualify for low rates on a refinanced student loan.

What’s more, refinancing lets you restructure your debt by choosing a new repayment plan. You might shorten your term to pay your loan off fast. Or you could give yourself extra time and decrease your monthly bills.

Most student loan refinancing companies, whether they’re a bank, credit union or online lender such as SoFi or Earnest, offer both variable and fixed rates, as well as flexible repayment terms between five and 20 years.

If you’re considering refinancing, make sure to compare offers from a few different lenders. You can check your rates online after providing a few basic pieces of information (and don’t worry, your credit won’t be impacted).

By shopping around, you could find your best offer for a refinanced student loan.

A note of caution about refinancing federal student loans

Refinancing and consolidating your loans through a private lender — and not the federal government — means you are taking out a private loan. As a result, you will no longer eligible for federal repayment options that can help you out during tough times, such as income-driven repayment plans or Public Service Loan Forgiveness.

Most private lenders don’t offer these same plans, though some might grant forbearance (or temporarily pause your payments) during a time of financial hardship.

Before turning any federal student loans into a private one through refinancing, make sure you’re confident about your ability to keep up with repayment, as you’ll lose access to federal protections.

Is student loan consolidation right for you?

Whether you have federal student loans, private student loans, or both, consolidation could be a good fit for you if you’re looking to simplify repayment and ease the burden of numerous due dates and loan servicers.

Federal student loan consolidation via a Direct Consolidation Loan can also lower your payments (assuming you choose a longer payoff term), but can result in more interest over time.

Consolidating and refinancing with a private lender, on the other hand, could lower your monthly payments or save you money on interest — or maybe even accomplish both.

Before making changes to your student loans, make sure you understand the ins and outs of both types of consolidation. By doing your due diligence, you’ll have a clear sense of how consolidation or refinancing will affect your costs of borrowing over the life of your loans.

Melanie Lockert contributed to this article.