Should I Consolidate My Student Loans?

Every year, student loan consolidation helps thousands of federal borrowers lower their monthly payments, simplify their bills, and take control of their debt. Student loan consolidation is a federal program that allows you to swap out your current loans for a single new loan, often with a lower monthly payment. This can provide invaluable breathing room in your budget and help you get your finances back on track.

Right now, more than 34% of federal student borrowers choose to consolidate their loans. That said, federal debt consolidation loans aren’t for everyone. If you have private loans or think you could qualify for a lower interest rate on your debt, you may want to consider other options. Here’s how to figure out whether student loan consolidation is right for you.

What is student loan consolidation?

Student loan consolidation is a program that combines multiple federal loans into a single new loan. Almost all federal borrowers are eligible. Once your application is accepted, the U.S. Department of Education will pay off all your existing loans for you, then issue you a new loan called a Direct Consolidation Loan. Instead of having to juggle multiple monthly bills and due dates, you’ll be left with a single, simple monthly payment.

Because you’ll be getting a new loan, you’ll have the opportunity to choose a new loan term. Choosing to extend your repayment period could cost you more in interest over the life of the loan, but it can also lower your monthly payment by up to hundreds of dollars each month.

The pros of student loan consolidation

Student loan consolidation comes with a ton of benefits. Here are a few of the biggest reasons to consolidate.

1. You could get a lower monthly payment

When you consolidate your federal student loans, you’ll have the opportunity to select a new loan term — usually anywhere from 10 to 30 years. If you choose a longer term, your loan repayment will be spread over a longer period of time. As a result, your bill will be lower.

2. Your bill will be much simpler

Many federal borrowers end up with five to ten different loans — all with different bill amounts, online portals, and due dates. When you complete a student loan consolidation, you’ll swap all that out for a single, straightforward monthly bill. This can make it much easier to keep track of deadlines and avoid missed payments.

3. You could qualify for flexible repayment options

When you fill out a Direct Consolidation Loan application, you’ll have the opportunity to select from a range of flexible loan options. These include graduated repayment plans and income-driven repayment plans. These plans scale your monthly payment amount according to your income. That can make your loans more affordable and easier to pay off.

4. It’s free

Applying to consolidate your federal loans is free. You won’t have to pay an origination fee for your new loan or any prepayment penalties for getting out of your existing debt early. Many federal loan servicers also offer autopay discounts to borrowers who set up their bank accounts for automatic billing. All these options make student loan consolidation an affordable way to manage debt.

5. You’ll retain access to federal protections, including loan forgiveness

Since a Direct Consolidation Loan is a type of federal loan, you’ll retain access to federal deferment, forbearance, and federal loan forgiveness options even after you consolidate. While some private lenders, including Earnest¹, offer deferment, forbearance, and skip-a-payment options², government protections tend to be more generous.

6. It’s one path to rehabilitating a defaulted loan

Federal student loan consolidation can help you recover from student loan default. Getting out of default can help you repair your credit profile and avoid legal consequences.

7. You don’t need good credit to get a good rate

You don’t need an excellent credit score to qualify for student loan consolidation. That’s because, unlike private lenders, federal lenders don’t look at your credit report or consider your creditworthiness during the loan application process for most federal loans, however there are some that do require a credit check.

8. You can choose a new loan servicer

Normally, the U.S. Department of Education doesn’t allow you to request a different loan servicer if you’re unhappy with your current one. But when you consolidate, you’ll have an opportunity to select a new servicer during the application process.

The cons of student loan consolidation

Student loan consolidation may not be the best option for all borrowers. Here are a few drawbacks to consider before moving forward.

1. You could pay more over the life of the loan

If you choose to extend your loan term when you consolidate, you’ll get a lower monthly payment, but you won’t save money over the life of the loan. Because you’ll be paying off your debt over a longer period of time, you’ll make more total payments — and therefore pay more in total interest charges. To find out how much consolidation will cost, you can use Earnest’s online debt consolidation calculator.

2. Any outstanding interest will capitalize

When you consolidate your student debt, the unpaid interest on your current loans will get “capitalized” or added to the principal. You’ll then have to pay interest on that new, higher loan amount. This will cost you more in interest charges over the life of the loan.

3. It’s only available for federal loans

You cannot combine federal and private student loans through federal consolidation. If you have a mix of loan types, you may want to consider refinancing through a private lender³. Just keep in mind that this process isn’t reversible; once you refinance a federal loan, it becomes permanently private.

4. It cannot get you a lower interest rate

Because the federal government doesn’t perform a credit check during your consolidation application, they can’t know if you’ve gotten a new job, increased your income, or lowered your debt-to-income ratio. That means they can’t reward you for these things by offering you a lower interest rate the way private lenders can.

Instead, the new interest rate on your consolidated loan will simply be the weighted average of all your current interest rates. As a result, you can’t save money on your student loans via federal consolidation. The only way to get a lower rate on your student debt is to refinance through a private lender.

5. You could lose credit for payments made on an income-driven repayment plan or PSLF

If you’ve been making student loan payments toward Public Service Loan Forgiveness (PSLF) or an income-driven repayment plan, consolidation could restart your payment clock. If this happens, you’ll lose credit for previous payments and have to start from scratch. There are some exceptions to this rule, but if you’ve already consolidated once before, you’re less likely to qualify for those exceptions.

What are student loan consolidation rates now?

The interest rate on your consolidated loan will become a weighted average of the interest rates on all your current loans, rounded up to the nearest one-eighth of 1%.

However, private lenders won’t offer you their lowest rates unless you have an excellent credit score. The federal government, on the other hand, will offer you the same weighted-average interest rate no matter how good your credit history is.

However, federal rates are significantly lower than what you’d pay if you tried to use credit cards or payday loans to cover gaps in your finances. These are both forms of high-interest debt, and they’re more likely to cost you money than help you get out of debt in the long run.

How do I apply for federal loan consolidation?

To apply for federal student loan consolidation, simply log in to your studentaid.gov account and fill out the “Federal Direct Consolidation Loan Application and Promissory Note.” The form takes about 30 minutes to complete and will ask you to select the loans you hope to consolidate, choose your new loan term, and pick a preferred servicer.

Once your application is accepted, the U.S. Department of Education will make a direct payment to each of your current loan servicers, closing out your existing loans. When that process is complete, you’ll be responsible for only your new consolidation loan.

An alternative to student loan consolidation: Student loan refinancing

Student loan refinancing⁴ is the process of taking out a new private loan to pay off your old student loans. This new loan will have new terms and a new interest rate. If you have a better credit score now than you did when you took out your original student loans, you may be able to get a lower interest rate. This could save you hundreds to thousands of dollars over the life of your loan.

Like federal consolidation, refinancing can help combine multiple student loan payments into a single monthly payment, making your debt easier to manage and track. And unlike federal consolidation, you can refinance either federal or private loans — or a mix of both. Refinancing can also help you release a cosigner on a private student loan.

Many private lenders, including banks and credit unions, offer convenient repayment terms and fast response times. Some will even deliver application decisions as fast as the next business day.

Keep in mind, however, that refinancing federal student loans means losing access to federal benefits, such as income-driven repayment plans, loan forgiveness programs, and deferment or forbearance options. That’s why it’s crucial to weigh the potential savings against the loss of these benefits before deciding to refinance student loans.

Learn more about student loan refinancing

Refinancing is one of the best ways to save money on your student loans and get out of debt fast. Unlike federal student loan consolidation, you can use refinancing to secure a lower interest rate, combine various loan types, and release cosigners from private student loans.

Earnest is one of the leading private refinance lenders. We never charge any origination fees, late fees, or prepayment penalties, and we offer a range of flexible repayment options to help borrowers meet their financial goals. To learn more about refinancing with Earnest, you can scan through common questions on our FAQs page, or prequalify to see what kind of interest rates we can offer you. Prequalifying only takes a few minutes and involves a soft credit inquiry, which means it won’t affect your credit score. Ready to refinance? Check your rate today to see how much you could save.

Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.

1 Before applying for private student loans, it’s best to maximize your other sources of financial aid first. It’s recommended to use a 3-step approach to assembling the funds you need: 1) Look for funds you don’t have to pay back, like scholarships, grant, and work-study opportunities. 2) Next, fill out a FAFSA(R) form to apply for federal student loans. Federal Direct subsidized and unsubsidized loans, excluding PLUS Loan for Parents and PLUS Loan for Graduate and Professional Students which require a credit check and a credit worthy endorser if the parent or graduate or professional student has adverse credit, do not require a credit check or cosigner, and offer various protections if your struggling with your payments. 3) Finally, consider a private student loan to cover any difference between your total cost of attendance and the amount not covered in steps 1 and 2. For more information, visit the Department of Education website at https://studentaid.ed.gov.

2 Earnest clients may skip a payment through a one, one-month forbearance during a 12 month period. Your first request to skip a pay can be made once you’ve made at least 6 months of consecutive on-time full principal and interest payments, and your loan is in good standing. The interest accrued during the skipped month will result in an increase in your remaining minimum payment. The final payoff date on your loan will be extended by the length of the skipped payment periods. Any unpaid accrued interest may capitalize (added to the principal balance) at the end of the forbearance period by adding unpaid accrued interest to the outstanding principal as permitted by law and the terms of the loan agreement.

3 You may lose benefits associated with your underlying federal and/or private loans if you refinance such as federal Income-driven Repayment Plans, Economic Hardship Deferment, Public Service Loan Forgiveness, or other deferment and forbearance options. If you file for bankruptcy, you may still be required to pay back this loan.

4 Choosing to refinance to a longer term may lower your monthly payment, but increase the amount of interest you may pay. Choosing to refinance to a shorter term may increase your monthly payment, but lower the amount of interest you may pay. Review your loan documentation for the total cost of your refinanced loan.