How To Consolidate Student Loans

More than 44 million borrowers owe $1.59 trillion in student loan debt in 2021. Most of them could streamline the repayment process by consolidating their student loans. Learn how to consolidate before the federal student loan payment moratorium ends on May 1, 2022.

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Home > Students & Debt > What is the Student Loan Consolidation Program?

Why Consolidate Student Loans?

It simplifies repayment and could save you money. It is quite common for people with student loans to deal with 10-12 lending institutions, which means 10-12 payments and 10-12 due dates each month. When you consolidate student loans – either federal or private – it’s one payment to one lender, once-a-month. Simple.

About the Program

Loan consolidation for student loans was created to make it easier for millions of borrowers to pay off their debt. Both federal and private lenders recognize that lower monthly payments help may be the best option, if you don’t get the job you want immediately after graduating from colleges. Find out more about the choices debt consolidation offers.

When You Will Qualify

Ideally, you would qualify for debt consolidation after graduation. However, you also could qualify when you leave school or are enrolled less than half-time. You can’t consolidate private loans in the federal Direct Consolidation Loan program, but some private lenders allow you to consolidate federal and private loans together.

Should I Consolidate My Student Loans?

The Direct Consolidation Loan program is the right choice if your goal is to simplify the process for repaying federal loans and keep your options open for the many repayment plans available for federal loans. You will not get lower interest rates. In fact, it may increase slightly. Your rate is determined by the weighted average of the interest on the loans being consolidated rounded up to the nearest one-eighth of 1%.

If you’re using private lenders for student loan consolidation, there is a chance you could get a better interest rate and possibly lower monthly payments. A slim chance, but nonetheless, a chance. That’s because federal loan rates are so low – fixed rates of 3.73% for undergraduates, 5.28-6.28% for graduates in 2021 – that it’s difficult for private lenders to beat the rates and make a profit.

Still, some companies, like SoFi and LendKey, have found a way to offer students a competitive rate and a variety of repayment conditions. These are private loans where credit score and other conditions are weighed in. If you have a tremendous job that pays really well and no dings on your credit report when you leave school, you could find a lender willing to give you a break on interest to get your business. If not … well, it never hurts to ask

Student Loan Consolidation & Your Credit Score

All federal and private student loans are installment loans and considered good debt because it represents an investment in your future. Having installment loans in addition to revolving credit like credit cards is great for your credit mix, which makes up 10% of your credit score.

The best way to improve your credit score is to make on-time monthly payments, and student loan consolidation can assist in that. Consolidation makes your student loans more manageable and easier to track by combining payments into one lower monthly bill. This will decrease the chances of accidentally missing a payment, and the lower payment will help you budget month-to-month.

Student loan consolidation won’t strengthen your credit rating directly, but the benefits of consolidation can ensure your score continues to trend upward.

How to Consolidate Federal Direct Loans

The Federal Direct Consolidation Loan program starts with filling out an application and promissory note at this site. You will need your loan records and account statements. The form asks basic questions (name, social security number, date of birth, address, etc.); what loans you do and do not want to consolidate; and what repayment plan you will be using.

There also is a section detailing certifications, terms and conditions and borrower’s rights and responsibilities. If you sign and date the application, it is a binding contract. If you submit it without signing, the application can’t be processed.

There are no fees associated with the Direct Consolidation Loan process. The application process is free.

Your student loan servicer should be able to answer any questions you have about student loan debt consolidation. To contact your student loan servicer log into your federal student aid account and look for contact information.

List of student loan servicers:

  • CornerStone: 1 (800) 663-1662
  • FedLoan Servicing: 1 (800) 699-2908
  • Granite State Management & Resources: 1 (888) 556-0022
  • Great Lakes Educational Loan Services: 1 (800) 236-4300
  • HESC/EdFinancial: 1(855) 337-6884
  • MOHELA: 1 (888) 866-4352
  • Navient: 1 (800) 722-1300
  •  Nelnet: 1 (888) 486-4722
  • OSLA: 1 (866) 264-976

Before you commit, however, compare the Direct Student Loan Consolidation with the consolidation and student loan refinancing programs available in the private sector.

How to Consolidate Private Student Loans

When you consolidate student loans through private lenders, you essentially are refinancing your loans. Combining several student loans, whether federal or private, only makes sense if you are going to receive a lower interest rate and reduced monthly payment terms.

The market for consolidating and refinancing student loan debt has exploded over the last five years. Online lenders SoFi and LendKey have jumped to the front of the line among newcomers who are becoming big players in a business that traditionally was dominated by banks and credit unions.

SoFi’s success is tied to innovative services that start with putting the entire loan application process online and making it fast. Very, very fast. It takes just a few minutes to fill out the application and even less time – usually about two minutes – to receive an answer on whether you’ve been approved.

Some more attractive features of dealing with SoFi include:

  • You can consolidate federal and private student loans into one package
  • You can borrow the full amount of your qualified student loans
  • Fixed interest rates from 3.25%-7.25% APR and variable rates as low as 2.58% were available in February of 2018
  • Loan terms of 5,7, 10, 15 or 20 years
  • A 0.25% rate reduction for automatic payments

One other feature that distinguishes SoFi is the pause button for customers who lose their job. SoFi will put a hold on payments for three month stretches (up to a total of 12 months) and even help you go through the job hunting process. Interest does accumulate on the loan while you’re looking for a new job, but no payments are expected.

There are some issues to consider with SoFi. Though the minimum credit score to apply is 660, the typical SoFi customer has a credit score above 700. Most of its clientele are graduate students and those with law school or medical degrees. The average approved borrower has an income over $100,000.

Their website even states that the company wants people who “… have a responsible financial history and a strong monthly cash flow.” In other words, it might be tough to qualify with a low credit score or income.

» Learn More: Personal Loans for Bad Credit

LendKey does a lot of the same things, only it uses a network of community banks and credit unions to fund the consolidation loan. Like SoFi, the application process for LendKey is completely online and takes around 10 minutes with a response time of about three minutes.

However, there are a few twists in the LendKey program worth noting.

The minimum credit score to apply is 680 and borrowers must currently be employed with a minimum annual income of $24,000. The unemployment protection benefit runs 18 months and borrowers could make “interest only” payments for up to four years.

Some other companies crowding the market include Common Bond, Citizens Bank, Laurel Road and earnest. Each of them operate on essentially the same platform as SoFi and LendKey, with very slight differences in interest rates and loan terms offered.

Pros and Cons of Private Student Loan Consolidation

Why you should:

  • Lower interest rate/monthly payments. Interest rates do drop. Your credit score can improve. That combination makes you an attractive borrower and should result in lower monthly payments. For example, refinancing medical school debt can save you thousands of dollars, especially if you carry more than $100,000 in loans.
  • Less hassle. The average borrower has seven loans and three loan servicer companies when they graduate. That’s a lot of responsibility to keep up with. Consolidation means one check to one lender, once-a-month.
  • Variable or fixed? All federal loans are fixed rate, but private lenders can offer tempting variable rates of less than 3%. Just hope the economy doesn’t go in the dump and your variable rates go through the roof.
  • Remove co-signer. Mom and Dad were good enough to co-sign the loan so I’d get a better interest rate. Now it’s my obligation to let them off the hook and handle the debt by myself.

Here are a few reasons why you shouldn’t consolidate loans:

  • Perks are reduced or gone. You can only consolidate federal student loans one time. If interest rates fall, you’re out of luck. Do-overs aren’t allowed. It also could affect your eligibility for Public Service Loan Forgiveness program so check before consolidating.
  • End up paying more. Yes, you get some relief, but the life of the loan is extended and you’ll pay a lot more in interest. For example, the average student loan debt for 2021 graduates was $37,105. If their interest rate was 5%, they will pay $10,140 in interest over 10 years or a total of $48,312. If the loan period increases to 20 years, they pay $21,704 in interest and $58,876 total.
  • Good rates already. Interest rates in 2016 for direct unsubsidized loans were 4.29, up slightly from 3.40 in 2013. Hard to imagine beating that rate.

Loan Consolidation vs. Loan Refinancing

There is an important distinction between just “consolidating” a loan and “refinancing” it.

Consolidation is combining the various lenders that make up a typical federal student loan and taking out one loan that pays them all off. Since there are nine student loan servicers out there – and many of the 44 million borrowers must deal with several of them – consolidating them down to one should make repayment less confusing, if nothing else.

Doing so through the Direct Consolidation programs, however, means you will not lower your payments. In fact, they could go up. The interest rate on Direct Consolidation Loans is the weighted average of all loans rounded up to the nearest one-eighth of 1%.

Refinancing, on the other hand, should only be done if it is going to lower the interest rate you pay. Private lenders can do that because they use factors not used by the Direct Consolidation Loan program, to arrive the interest rate.

For example, private lenders will use your credit score and income to arrive at a rate that might be lower than what you are paying. They also can consolidate federal and private loans, while the Direct Consolidation Loan program does not allow private loans to be consolidated. wants to help those in debt understand their finances and equip themselves with the tools to manage debt. Our information is available for free, however the services that appear on this site are provided by companies who may pay us a marketing fee when you click or sign up. These companies may impact how and where the services appear on the page, but do not affect our editorial decisions, recommendations, or advice. Here is a list of our service providers.

Types of Loans Eligible for Consolidation

There are two primary types of educational loans – private and federal. While both may be eligible for consolidation, it is important to think of these two types independent of each other when considering consolidation.

Federal Student Loans

Federal student loans are the easiest and most beneficial to consolidate because they offer low interest rates, increased payback terms (which decreases the monthly cost) and because they reduce the number of lending institutions you have to pay every month. For example, instead of making multiple payments to multiple lenders at various times of the month, you simplify the equation by making a single monthly payment.

Private Student Loans

Private student loans are granted and managed by lending institutions – banks, credit unions, college foundations – and typically charge a higher fixed or variable-interest rate than federally funded loan programs. Private student loans are credit-based, meaning student borrowers with high credit scores will pay lower interest rates than those with low scores because banks assess the risk of each borrower.

Federal vs. Private Student Loans

All students are eligible for federal loans, regardless of financial need. You can consolidate Direct Student Loans using one of several income-based repayment plans and there are loan forgiveness programs.

With private loans, your credit score is a major factor in whether you qualify for a loan. You may need a co-signer. A debt consolidation plan is one of the few repayment options available on private loans and there are no loan forgiveness programs.

You can’t include private loans when consolidating through the federal Direct Consolidation Loan program. You can include federal loans when consolidating with a private lender, but you lose the perks associated with federal loans so it’s best not to mix the two.

Can You Consolidate Private & Federal Loans?

A federal Direct Consolidation Loan cannot consolidate private and federal loans, only multiple federal loans. Private lenders can consolidate private and federal loans, but at the cost of losing valuable federal repayment options.

Income-based repayment plans, loan forgiveness and deferment and forbearance are some of the perks of borrowing from the federal government. If you plan to take advantage of any of these options, you should consolidate federal and private loans separately.

Some federal loans require consolidation to be eligible for alternative federal repayment plans. Generally, if you have Perkins loans or most FFEL loans you need to consolidate them in order to qualify for REPAYE, PAYE, IBR or ICR. Be aware that consolidating federal loans restarts the process for federal loan forgiveness.

Federal Student Loan Repayment Plans

If you’re paying off federal student loans, you are one of 44 million borrowers with outstanding student loan debt. The Direct Consolidation Loan Program offers several repayment plans that give you up to 25 years to pay off the debt. The programs are tailored to your income and family size. You can even switch programs if your financial or family situation changes.

Consolidating Private Student Loans

The process for consolidating private student loans is focused around your credit score. If your credit score has improved dramatically since graduation, you may be in line for a lower interest rate. Home equity loans are another way to consolidate a lower interest rate. There also could be a variable interest rate loan that suits your situation. Contact several lenders before making a final decision on consolidating your student loans through a private lender.

Consolidating Student Loans with Bad Credit

Federal student loan consolidation doesn’t require a credit check, so even if you have bad credit you will qualify. A federal Direct Consolidation Loan can even rehabilitate your student loans if you are in default.

Consolidating private student loans is more complicated. If your score is under 650, It is unlikely you will qualify for consolidation from private lenders by yourself. You’ll need to find a co-signer with good credit and continue to pay bills on time until your credit score improves.

Things get more difficult without a co-signer. Local credit unions usually have softer requirements than traditional lending services. They might be willing take a chance.

Maxing-out credit cards tanks a credit score because credit utilization (ratio of how much you owe vs. your credit limit), makes up 30% of your credit score. A quick way to boost your score is to lower your utilization by paying down your credit cards to at least 30% of your limit. Wait a couple of months, and then apply for student loan consolidation.

Consolidating Defaulted Student Loans

Defaulted student loans can still be consolidated under one of the income-driven repayment plans. To enroll in a different repayment plan, you need to make three consecutive on-time payments.

Your loans will no longer be in default once they are consolidated into a Direct Consolidation Loan, however, it will remain on your credit report as a negative mark. As an alternative, you can opt to enter student loan rehabilitation, which will remove defaulted student loans from your credit report.

It is unlikely you will find a lender to consolidate private student loans in default. In this case, contact your lender and request repayment assistance. They might be willing to offer forbearance (a temporary pause on payments) or temporarily adjust your monthly payment. Do this before they send your debt to collections. The original lender is more likely than a debt collector to work with you.

About The Author

Max Fay

Max Fay has been writing about personal finance for for the past five years. His expertise is in student loans, credit cards and mortgages. Max inherited a genetic predisposition to being tight with his money and free with financial advice. He was published in every major newspaper in Florida while working his way through Florida State University. He can be reached at [email protected].


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