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How student loan consolidation works

Should you trade in your federal and private debt for one monthly repayment?

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Anna Serio
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Consolidating your student loans can help simplify repayments, switch up your servicer, score better terms, qualify for different benefits and more. But which option to consider largely depends on the type of student loans you have, your financial situation and your career plans.

What is student loan consolidation?

Student loan consolidation — also known as refinancing — involves taking out a new loan with different rates, terms and features to pay off your current student loans. Consolidation gives you one monthly repayment and often allows you to switch your servicer if you’re unhappy with the company that handles repayments.

How consolidation works depends on what type of student loan you have: federal or private.

Federal student loan consolidation

Federal student loan consolidation refers to taking out a Direct Consolidation Loan. This is a federal loan that allows you to continue to take advantage of programs like income-driven repayments and forgiveness.

You don’t need good credit to apply, though you can only use it to consolidate federal student loans. This type of consolidation allows you to explore more flexible repayment options — like 30-year terms — and switch up your servicer. However, your rates generally remain the same.

Private student loan consolidation

Private student loan consolidation is typically referred to as student loan refinancing. It involves taking out a new loan with a private lender to pay off all or some of your student loans. You can refinance both federal and private loans together, though you’ll lose some benefits on your federal loans.

You generally need strong credit and a low debt-to-income ratio to qualify for a better deal when you refinance. Ideally, refinancing can help you qualify for a lower rate, longer loan term or give you access to benefits like reduced repayments during a medical residency.

How to refinance student loans with a private lender

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Federal student loan consolidation vs. private student loan refinancing

Federal student loan consolidationPrivate student loan refinancing
Which loans can I consolidate?FederalFederal and private
Will I get one monthly payment?YesYes
Can I lower my interest rate?NoYes
Is a credit check required?NoYes
Can I change my servicer?YesYes
Will I lose federal student loan benefits?NoYes

How do I consolidate my student loans?

The process for consolidating your student loans differs depending on whether you’re taking out a federal Direct Consolidation Loan or refinancing with a private lender.

Federal student loan consolidation

You can apply for a Direct Consolidation Loan by completing a form on the Department of Education’s Federal Student Aid (FSA) website or downloading a PDF and mailing it in. The application typically takes 30 minutes to complete and asks you basic questions about yourself, your current loans and the repayment plan you’d like to use for your new loan.

Step-by-step instructions to apply for a Direct Consolidation Loan

Private student loan refinancing

Many lenders offer student loan refinancing, so start by comparing providers. Go in with a goal in mind, like securing a longer term, lower rate, more flexible repayments or a different servicer.

Once you’ve narrowed down your choices to a few lenders, find out what rates you can prequalify for before settling on one. You can usually complete the application by filling out a form and uploading documents online.

Can I consolidate student loans with other types of debt?

It’s possible to consolidate student loans with other types of debt if you take out a personal or home equity loan. Some people prefer to do this as part of a larger debt consolidation plan.

However, you’ll have even less flexibility when it comes to repayments and lose eligibility for almost all forgiveness programs — even those available to private student loan providers. Unless your debts are extremely unmanageable, you might want to stick to a student loan refinancing provider.

4 best debt consolidation loans by credit score

Which type of student loan consolidation is right for me?

Which type of consolidation is right for you depends on your unique circumstances.

Consider federal student loan consolidation if …

  • You have federal loans. Private student loans aren’t eligible for a Direct Consolidation Loan.
  • You want to apply for federal forgiveness. Refinancing with a private lender makes you ineligible for federal student loan forgiveness programs.
  • You rely on income-driven repayments. Most private refinancing providers don’t offer income-based repayments on student loans.
  • You plan on going back to school. Federal student loans come with more comprehensive deferment and forbearance options than private lenders typically offer.
  • You have poor credit. Applying for a Direct Consolidation Loan doesn’t involve a credit check.
  • You have a DTI above 20%. Most private lenders only offer competitive deals to borrowers with a DTI below 20%.

Consider private student loan refinancing if …

  • You have private loans. Student loan refinancing is the only consolidation option for private student loans.
  • You have federal loans but don’t plan on taking advantage of federal benefits. You might be able to benefit from lower rates offered by a private lender.
  • You’re in a high-earning profession. Some lenders have special refinancing programs specifically for doctors, lawyers and other high-earning fields, often with even more competitive rates.
  • You have strong personal credit. You need a good credit score and strong credit history to qualify for the most competitive deal.
  • You have a DTI below 20%. You need a low DTI to qualify for the most favorable rates and terms with private refinancing providers. You can learn more with our article on DTI ratios and student loan refinancing.

Bottom line

Student loan consolidation works differently depending on the type of student loans you have. Federal loan holders might benefit the most from a Direct Consolidation Loan. However, if you’re a high earner with strong credit, student loan refinancing could actually be a more favorable option.

Learn more about your debt consolidation options or how student loans work by visiting our guides.

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