If you’ve got several different student loans spread across multiple servicers, you might have trouble managing your loans or keeping up with your payments. One option that can help is student loan debt consolidation.
A Direct Consolidation Loan combines your federal student loans into one single loan. Instead of having to track multiple student loan servicers and payment due dates, you’ll only make one monthly payment to a single lender (or servicer — sometimes they’re one and the same).
While consolidating student loans can be a smart way to manage your repayment, it is frequently misunderstood. Here are seven of the most common misconceptions about student loan debt consolidation.
Myth 1: Student loan debt consolidation is the same as refinancing
Myth 2: Consolidation saves you money on your loans
Myth 3: The only way to lock in a fixed interest rate is by consolidating
Myth 4: You can consolidate federal and private student loans together
Myth 5: You have to pay to consolidate your loans
Myth 6: You need excellent credit to consolidate student loans
Myth 7: Consolidation is a good idea for all borrowers
Take out a student loan debt consolidation or refinancing loan
Many people think consolidation and refinancing are interchangeable terms, but they’re two very distinct processes.
Student loan debt consolidation involves combining federal loans into a Direct Consolidation Loan, which is issued through the Department of Education. Refinancing, on the other hand, is only available through private lenders.
You can choose to refinance one loan or multiple loans, and they can be federal or private. But unlike consolidation, refinancing federal loans with a private lender makes them private loans, meaning you lose access to federal repayment plans and forgiveness programs.
To pursue student loan debt consolidation, you can start the process on the Department of Education’s website. If you’re interested in refinancing, compare your offers from multiple banks and lenders.
Student loan consolidation can simplify repayment by combining multiple federal loans into one. But it won’t save you money on your loans or get you a lower interest rate.
Rather, your interest rate after federal consolidation will be the weighted average of the rates of the loans you’re consolidating, rounded up to the nearest one-eighth of a percent. So your interest rates will basically stay the same, if not increase slightly.
Refinancing, on the other hand, can potentially lower your interest rate. As long as you have strong credit and a secure income — or can apply with a cosigner who does — you could snag a lower interest rate and save money on your student loans if you keep the same loan terms.
Many borrowers choose to refinance so they can get a lower interest rate, which in turn can help reduce monthly payments and save money on interest over the length of the loan.
If you want to compare the immediate benefits of Direct Loan consolidation versus private refinancing, check out our refinancing vs. student loan consolidation calculator
For a long time, consolidating your federal loans was the only way to get a fixed interest rate, rather than a variable one, for the length of repayment. That could protect you from market fluctuations and help you save money.
However, that changed in 2006. The government passed a bill that fixed interest rates for the life of federal loans. Even if interest rates skyrocketed after you graduated, you would continue to pay the same interest rate on your original debt. That means if you have federal loans, there’s no need to worry about consolidating to get a fixed rate; you already have one.
Private loans, however, can come with fixed or variable rates, and the same holds true for refinanced student loans. When you take out a private student loan or refinance one or more existing ones, you can choose between variable and fixed rates.
Variable interest rates tend to start off lower but can increase or decrease over time in response to market changes. If your interest rates have increased or you’re concerned about rising rates, refinancing your debt to a fixed-rate loan can provide security.
Only federal student loans are eligible for a Direct Consolidation Loan. Private student loans are not eligible for consolidation through the Department of Education.
That said, you can combine federal and private loans through student loan refinancing. Or, you can pick a single loan to refinance and leave the rest as they are.
When it comes to refinancing, it’s up to you to cherry-pick which loans would benefit from refinancing and which loans would be better left alone. And if you do refinance federal loans with a private lender, you turn your debt private and lose access to federal programs and protections, including Direct Loan consolidation, income-driven repayment plans and Public Service Loan Forgiveness.
There are many companies out there that will charge you a fee in return for consolidating your loans for you. However, there’s no need to pay anyone to do it; you can do it yourself for free. The application for federal Direct Consolidation Loans can be completed online in about 30 minutes.
If you have private loans you would like to refinance, you can do so by shopping for lenders on your own and comparing offers. Once you find terms that work for you, you can submit your application online. The best private lenders do not charge application, origination or disbursement fees.
Are you wondering if you have good enough credit for student loan debt consolidation? Rest assured that the consolidation process doesn’t check your credit at all.
To be eligible, you simply need to have qualifying federal student loans that are in active repayment or in a grace period. If your loans have become delinquent or fallen into default, you might be able to consolidate them to get them back into good standing.
While consolidation doesn’t have credit requirements, refinancing does. Though refinancing could save you money on your loans, you’ll need to show you have the financial credentials to qualify for lower rates. You or your cosigner will need to have a strong credit score and steady income.
While student loan debt consolidation can be a wise move for some, it’s not for everyone. For federal loans, a Direct Consolidation Loan can help you if you plan to apply for an income-driven repayment plan. But it can also extend your repayment term, causing you to pay back more in interest fees.
You run the same risk when you refinance student loans. If you pick a long term of 15 years, for example, you’ll lower your monthly payments but increase the amount you’ll pay over the life of your loan.
Refinancing also isn’t the right move for you if you’re relying on federal programs and protections. While some private lenders offer flexible terms and forbearance and deferment programs, they don’t provide the same flexibility as Federal Student Aid.
Consolidating and refinancing can help you take control of your debt, but you should make sure you understand the trade-offs and have the financial security to handle your payments going forward before making changes to your student loans.
While student loan debt consolidation is often confused with student loan refinancing, it’s not the same process. Consolidation is a federal option, whereas refinancing is typically provided by a private lender. Recently, some states have also offered student loan refinancing for qualifying in-state borrowers.
It’s important to understand the differences, as well as clear up any misconceptions, before choosing to consolidate or refinance your student loans. If you’ve done your homework and decided that student loan refinancing is the better choice, we can help you through the process.
Rebecca Safier contributed to this report.