How Federal and Private Student Loan Consolidation Works

If you’re like many college graduates, you’ll graduate with a degree in one hand and piles of student loan debt in the other. Today’s college grads carry an average student loan debt of $32,731 [source].

Average student debt in 2017.

That debt could come from five, six, or even more student loans. Remembering to make all those payments isn’t easy, which is why many people accidentally forget to.

The more payments you miss, the harder your credit score will be hit (not to mention the potential late fees on top of it). If you’re overwhelmed trying to juggle all your student loan payments, for starters, you’re not alone.

But more importantly, there’s a solution: loan consolidation. Combining all your student loans creates just ONE monthly payment and could also save you money in interest.

Whether you have federal, private, or a combination of both, consolidating your loans may be the answer you’re looking for.

Let’s find out.

What is student loan consolidation?

Student loan consolidation refers to combining your federal and/or private loans and consolidating them into one loan. “The interest rate of all the loans is averaged out to create a new rate,” says Pierre-Emmanuel Jouve, a certified financial planner and founder of InsuraWealth.

Student loan consolidation is not refinancing. “Refinancing refers to taking out one big loan at a lower interest rate and using it to pay off your federal and private student loans,” says Jouve. Refinancing is possible through private student loans.

Whether you have private or federal student loans, there are consolidation options for each. It’s important to consider the type of loans you have when choosing the consolidation option that’s best for you.

Federal student loan consolidation

Federal student loan consolidation is done through a Direct Consolidation Loan offered by the Department of Education. It combines all of your federal loans into one, single loan.

Here’s a quick snapshot of how it works:

  1. Your original federal loans are marked as paid off.
  2. The balance from each is transferred into the new loan.
  3. Original loans are then closed for good.

Combining all of your federal loans into one makes it easier to make on-time payments–one loan, one payment.

It could also help you qualify for federal programs that may not have been available when you took out the original loans, such as alternative repayment plans and loan forgiveness. That being said, there’s also the possibility of losing some beneficial features from your original loans.

You’re able to apply for federal loan consolidation if you’ve graduated, dropped your course load to under half-time enrollment, or have left school altogether.

Federal student loan consolidation can only be used for federal loans, not private loans.


  • More likely to qualify

  • Easier to manage

  • Helps avoid default

  • Could make you eligible for other federal program


  • Rates are fixed

  • Potentially higher repayment amount

  • If you extend your loan repayment term, you may end up paying more when all is said and done.

  • Exclusive to federal loans only

  • Debt forgiveness is taxable

Advantages of federal student loan consolidation

More likely to qualify

Since you’re consolidating, not refinancing, your credit isn’t checked. This makes it easier to qualify. No credit check also means you’ll avoid a dip in your credit score.

Easier to manage

Multiple loans mean multiple payments. The more payments you have, the more likely you are to be late making them. Consolidating all of those payments into one, single payment makes it easier to budget and pay your student loans on time.

Helps avoid default

When you consolidate your loans, you’re changing the loan terms and lowering your monthly payment. This creates a new, more affordable repayment amount, which makes it easier to avoid defaulting on your loan.

Could make you eligible for other federal programs

When you consolidate your federal loans, you could be eligible for programs that offer relief during tough financial times, like loan forgiveness and income-driven repayment plans.

Disadvantages of federal student loan consolidation

Rates are fixed

Federal loan consolidation offers a weighted average of all interest rates. Any unpaid interest will be added to your new balance. This could potentially leave you with a higher interest rate, which can’t be reduced. This loan consolidation calculator will help you figure out what your new interest rate will be if you choose to consolidate.

Potentially higher repayment amount

If you extend your loan repayment term, you may end up paying more when all is said and done.

Exclusive to federal loans only

Federal student loan consolidation can’t include any private student loans. You’ll have to do that separately.

Debt forgiveness is taxable

While income-driven repayment plans and student loan forgiveness are great perks, they could also be a dangerous pitfall. Loans forgiven under an income-driven repayment plan are considered taxable income, which could end up costing you more than you can afford. The only federal loans that are safe from being taxed when forgiven are teacher loans and public service loans.

Private student loan consolidation

Private student loan consolidation — also referred to as “refinancing” — is offered through private lenders.

Unlike federal loan consolidation, private loan consolidation can be used to combine ALL of your student debt–federal, private, or both–into one loan.

“When refinancing student loans through a private lender, the application process entails providing personal information, including which existing loans you want to refinance. You must also pass a credit review,” says Joe DePaulo, CEO and Co-Founder of College Ave Student Loans.

He adds, “After you’re approved and have completed the necessary documents, your new lender will send payments directly to the existing lenders to pay off the student loans you chose to refinance.”

Click here to discover five steps to getting the best rates. 


  • Easier to manage the one loan
  • Lowers your interest rate
  • Allows you to consolidate private AND federal loans
  • Co-signer options available

  • Lose federal loan benefits
  • Credit must be higher than 650 to qualify
  • Variable interest rate could increase payment
  • How to decide if you should consolidate

Advantages of private student loan consolidation

Easier to manage the one loan

Having only one loan to pay off will make missed and late payments a thing of the past.

Lowers your interest rate

Consolidate your student loans through a private lender, and you might get a lower interest rate that saves you thousands of dollars. You’ll pay much less over the course of the loan by getting a low-interest loan from lenders such as Lendkey, CommonBond, Upstart and College Ave.

Allows you to consolidate private AND federal loans

Private student loans offer the only way to combine private and federal loans into one payment.

Co-signer options available

Having a co-signer with solid credit and financial strength can help you get a lower rate, which can save you a ton of money.

Drawbacks of private student loan consolidation

Lose federal loan benefits

Private student loan consolidation causes you to lose benefits and protections specific to federal loans only. You lose the option to receive loan forgiveness and will no longer be eligible for income-driven repayment plans.

Credit must be higher than 650 to qualify

One of the main reasons to consolidate is to save money. If you have a low credit score, you may not qualify for an interest rate low enough to help you save money. If you have a high credit score of 700+, it’s a different story; you can qualify for really low interest rates.

Variable interest rate could increase payment

With private student loan consolidation, you’ll be offered the choice between a fixed or variable interest rate. There are benefits and drawbacks to both options. But it’s important to note that, with a variable interest rate, your payment could increase at some point to an amount that you can’t afford.

How to decide if you should consolidate

If your current income is low, you don’t expect it to rise in the future, and you work in a career eligible for forgiveness, Jouve advises consolidating your federal loans through the Department of Education. Refinance private student loans only when you can get a lower interest rate.

When your income and credit score are high enough, it’s best to refinance all of your loans (private and federal) with a low-interest private student loan. You can start comparing top lenders right now on SuperMoney’s reviews page.

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