May 29, 2020

student loan consolidation

Trying to manage several student loans and their various billing cycles can be a tedious and tiresome task. That’s why so many student loan borrowers decide to simplify things by consolidating their various student loans together.

If you’ve been thinking about merging your student loans into one new loan, you have two options: federal student loan consolidation or student loan refinancing. Each option has its own set of pros and cons. How do you choose?

In this guide,  we’ll look at the ins and outs of federal student loan consolidation before taking a closer look at student loan refinancing. Here’s what you need to know.

What Is Federal Student Loan Consolidation?

Federal student loan consolidation is only available to federal student loan borrowers. Through the Direct Consolidation Loan program, you can merge all your federal loans into one new loan without losing any federal benefits. That’s a big deal because it means you’ll still be eligible to join Income-Driven Repayment (IDR) plan or to pursue federal student loan forgiveness programs after you complete your consolidation.

It bears mentioning, however, that you’ll lose credit for any qualifying payments that you may have already made towards any forgiveness program. So, for example, if you were already halfway towards qualifying for Public Service Loan Forgiveness (PSLF), it wouldn’t be a smart move to consolidate those loans. If you plan to pursue either PSLF or IDR forgiveness, you’ll want to consolidate your loans before you begin repayment or soon after.

Another downside of federal student loan consolidation is that you can’t lower your interest rate. Instead, your rate will be the weighted average of the interest rates on all your loans rounded up to the nearest one-eighth of one percent.  However, you can choose your federal loan servicer during consolidation. So if you’re unhappy with your current servicer, consolidating your loans is one way to give them the boot.

Think federal student loan consolidation is right for you? If so, you can visit this page to start your Direct Consolidation loan application.

Pros and Cons of Student Loan Consolidation


  • Keep your federal student loan benefits
  • Opportunity to switch student loan servicers
  • No credit check
  • No income requirements


  • Can’t lower your interest rate
  • Private student loans are not eligible
  • Clock “restarts” for federal forgiveness programs

What Is Student Loan Refinancing?

Student loan refinancing is the process of taking out a new loan with a private lender. If you’re approved for a student loan refinancing loan, the lender will pay off all of the loans being consolidated and you’ll pay the new lender moving forward.

Unlike federal student loan consolidation, you can lower your rate interest during refinancing. And, depending on the size of your loans and their average interest rate, refinancing to a lower rate could save you tens of thousands of dollars in interest charges. However, in order to qualify for refinancing, you’ll need to meet the lender’s credit and income requirements.

One of the biggest disadvantages to student loan refinancing is that you’ll no longer qualify for any federal forgiveness programs. If you plan to pursue a federal forgiveness program or you think you may need to join an IDR plan, you’ll want to avoid student loan refinancing.

Finally, it’s important to point out that federal student loans will charge 0% interest until September 30, 2020 to provide relief to borrowers during the coronavirus crisis until September 30, 2020. Until then, there is virtually ZERO benefit to refinancing federal student loans. For now, I only recommend that private student loan borrowers consider refinancing.

Pros and Cons of Student Loan Consolidation


  • The potential to lower your interest rate
  • Can consolidate both private and federal student loans


  • Will no longer qualify for federal student loan benefits
  • Approval typically requires a strong credit score and income
  • Will not be able to take advantage of the CARES Act payment and interest forbearance

Student Loan Consolidation Vs. Refinancing At A Glance

Features Federal Student Loan Consolidation Student Loan Refinancing
Income-Driven Repayment Options? Yes No
Potential to Lower Interest Rate? No Yes
Requires Credit Check? No Yes
Requires Proof of Income? No Yes
Can Consolidate Private Loans? No Yes
Qualifies for CARES Act Forbearance? Yes No
Qualifies for Hardship Forbearance? Yes, up to 12 months Maybe, depending on the lender choose
Qualifies for Academic Deferment? Yes, up to 36 months Maybe, depending on the lender choose
Qualifies for PSLF? Yes, but all previous qualifying payments will be lost No
Can Choose Servicer? Yes, but only from the 10 federal student loan servicers Yes, borrowers can choose any private lender

When Federal Student Loan Consolidation Could Make Sense

A Direct Loan Consolidation could be a smart move for virtually anyone looking to consolidate their loans without losing access to federal benefits. There are really only two times that it wouldn’t be helpful.

First, if you have a lot of private loans, they won’t be eligible for federal consolidation. And, second, if you’ve already made a lot of progress towards a federal forgiveness program, it would be best to just keep your loans separate and put up with the hassle.

When Private Student Loan Refinancing Could Make Sense

Private student loan refinancing could make sense if you have a lot of private student loans and your credit score and income are much stronger than they were when you initially took out your loans. In that case, you may be able to drop your interest rate quite significantly by refinancing.

But should a federal student loan borrower ever consider refinancing? Right now, no, due to the current pause on payments and interest for federal student loans.

However, under normal circumstances, the one time you might want to consider federal student loan refinancing would be if you had a lot of Parent PLUS or Grad PLUS loans. PLUS loans come with much higher interest rates than Direct Subsidized and Unsubsidized loans, so refinancing them to a lower rate can make a real impact on how much you overall.


For private student loan borrowers, refinancing is your only option for consolidating your student loans. So if you can lower your interest rate during a refinance, it’s really a no-brainer that you should go for it.

Most federal student loan borrowers, however, would be better served to choose a Direct Consolidation Loan. Unless, of course, you’ve made significant progress towards a student loan forgiveness program, in which case you’ll want to avoid student loan consolidation altogether.

About the author 

Clint Proctor

Hi, I'm Clint! I love writing about everything personal finance. In addition to this site, my work has been featured on several major publications including Business Insider, Forbes, Credit Karma, and U.S. News and World Report. My hope is that you'll be able to find plenty of helpful information and inspiration on this site to help you reach your financial goals. Thanks for visiting!

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