Federal Vs. Private Student Loan Consolidation

If you’re struggling to make student loan payments, you’re certainly not alone. More than 44 million people in America have a student loan. That puts the national student loan debt at $1.3 TRILLION. 

Number of people with a student loan in the US.

The good news is that there are solutions to make payments simpler. One of the best solutions is to consolidate your loans. In other words, you’ll combine multiple payments into one monthly payment.

You can do this through the government (federal loans) or through a private lender (federal and private loans).

Here’s a closer look at both.

Federal student loan consolidation

You can consolidate your federal loans into a Direct Consolidation Loan offered by the Department of Education. By doing so, you can combine all of your federal loans into one loan. While there isn’t a financial advantage in doing so, it makes payments more convenient by narrowing it down to just one.

It can also allow you to take advantage of other federal programs that weren’t previously available when you took out your original loan (such as different payment plans discussed below). You qualify for consolidation if you’ve graduated, dropped to under half-time enrollment, or have left school.

The application shows the full list of federal loans that are eligible for consolidation.  

Pros

  • One monthly payment
  • Avoiding default
  • Fixed interest rate
  • Various repayment plans
  • Unemployment and economic hardship options
Cons

  • Unpaid interest will be added to your consolidation balance.
  • Additional Interest
  • Higher interest rate
  • Rates are fixed

Pros

  • One monthly payment. This is much simpler than managing multiple payments.
  • Avoiding default. Consolidation lets you change loan terms and lower your monthly payment. This results in a loan repayment amount that could help prevent you from defaulting.
  • Fixed interest rate. If you have multiple loans, you probably have multiple rates. Consolidating those loans into one payment means one rate (instant zen!).
  • Various repayment plans. Options include Standard (10 years), Extended (25 years), Graduated (low payments that gradually increase), and Income-based (determined by your current income).
  • Unemployment and economic hardship options. No job? Choose the unemployment option. Low-paying job? The economic hardship option might be a good fit.

Cons

  • Unpaid interest will be added to your consolidation balance. This increases the amount of interest paid.
  • Additional Interest. Lower monthly payments can result in more interest paid over the lifetime of the loan.
  • Higher interest rate. You could end up paying a higher interest rate, which is non-negotiable. Interest rates are calculated using this Loan Consolidation Calculator.
  • Rates are fixed. While this was also included in the “pros” list above (and with good reason), its drawback is that you don’t have the option to shop around, as you do with private loan rates.

That being said, private loan consolidation is another option to consider, as federal loan consolidation isn’t right for everyone.

Many students go to a private lender to consolidate their loan because the private lender offers a lower interest rate than the federal government, but it’s important for students to realize that refinancing a federal loan into a private loan will cause them to lose the perks that come with federal loans”

Private Loan Consolidation

Private loan consolidation allows you to combine all of your student debt– federal, private, or both– into one loan through a private lender. When choosing the best company, you must look for the following during your research:

  • Lowest rates
  • Origination fees
  • Prepayment penalties
  • Selection of loan types
  • Flexibility of loan terms
  • Eligibility requirements
  • Accepts federal and private loans

Click here to learn more.

To qualify for private loan consolidation, you need to have the following:

  • A credit score of 600 or higher
  • A steady income or way to make monthly payments
  • Proof of graduation
Pros

  • Rates are based on your current credit score
  • Various options that allow you to create an affordable payment plan
  • Option to combine
  • Co-signer options are available.
Cons

  • Lose federal loan perks
  • Additional fees
  • No chance of lower payments
  • Payment may increase
  • Credit score

Featured Student Loans

Lending PartnerAPR Range 
Fixed:
3.35% – 6.74% APR (with AutoPay)
Variable:
2.615% – 6.54% APR (with AutoPay)
Apply
Variable: as low as 2.52%*

Fixed:as low as 3.25%*

Apply
Variable: 2.56% – 6.73%*

Fixed: 3.37% – 6.99%*

Apply
Variable APR (Refinancing): 2.82% – 6.19%*
Fixed APR (Refinancing): 3.35% – 6.39%*
Apply
Variable APR: 2.81% – 10.24%*
Fixed APR: 4.45% – 11.76%*
Apply

Pros

  • Rates are based on your current credit score. If you have good credit, you could be making lower monthly payments.
  • Various options that allow you to create an affordable payment plan. If your credit score increases in the future, you can refinance. This could result in a lower interest rate and, therefore, a lower monthly payment (as opposed to federal consolidation rates, which are fixed and cannot be refinanced).
  • Option to combine. You can combine both federal and private loans into one loan, creating just one payment per month.
  • Co-signer options are available.

Cons

  • Lose federal loan perks. Karen Moon, independent college counselor and founder of Moonprep.com notes, “Many students go to a private lender to consolidate their loan because the private lender offers a lower interest rate than the federal government, but it’s important for students to realize that refinancing a federal loan into a private loan will cause them to lose the perks that come with federal loans, specifically: interest-free deferment, loan forgiveness programs, and income-based repayment plans. A student needs to first examine if they could utilize theses programs before turning to a private lender.”
  • Additional fees. Moon adds that “many private lenders charge an origination fee. They may try to lure you with a low-interest rate. If a student intends to pay off their loan in a short amount of time, it may not make sense to pay a large origination fee. Take this fee into consideration when calculating how much you will ultimately be paying.”
  • No chance of lower payments. If you lose your job, it’s hard to lower a private loan payment.
  • Payment may increase.If you choose a variable interest rate, your payment could increase, at some point during the duration of the loan, to an amount that you may not be able to afford.
  • Credit score. Your credit score usually needs to be 600 or higher to qualify.

It Pays to Compare

Don’t be shy when shopping for private loan rates. Ask questions. Get answers. Make an informed decision. Moon suggests that all students create an Excel spreadsheet to compare rates. She adds that comparing rates “gets confusing very quickly.”

Asking the right questions might mean the difference between getting a private loan that is in your best interest or one that will result in more (unnecessarily) money spent.

Since private loan rates vary, you can (and absolutely should) compare lenders. We’ve taken care of the hard part for you so that you can choose the best private lending option with ease. Check out our private lender reviews page now. You can compare rates and terms in one place without having to check dozens of websites.

Featured Student Loans

Lending PartnerAPR Range 
Fixed:
3.35% – 6.74% APR (with AutoPay)
Variable:
2.615% – 6.54% APR (with AutoPay)
Apply
Variable: as low as 2.52%*

Fixed:as low as 3.25%*

Apply
Variable: 2.56% – 6.73%*

Fixed: 3.37% – 6.99%*

Apply
Variable APR (Refinancing): 2.82% – 6.19%*
Fixed APR (Refinancing): 3.35% – 6.39%*
Apply
Variable APR: 2.81% – 10.24%*
Fixed APR: 4.45% – 11.76%*
Apply