Advantages and disadvantages of consolidating your student loans

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Weighing the pros and cons of student loan consolidation can help you decide if it’s the right decision to make. (Shutterstock)

When you have multiple student loans to manage, a monthly payment can easily slip through the cracks. Consolidate your student loans can help simplify your student loan repayment by giving you one monthly payment to manage.

But consolidation means something different depending on whether you have federal student loans, private student loans, or a combination of the two.

Before consolidating your student debt, it’s important to consider the pros and cons of student loan consolidation.

If you are exploring your loan options, visit Credible for learn more about private student loan refinancing and view your prequalified rates.

What is the difference between consolidation and refinancing?

Consolidation and refinancing are two terms that are sometimes used interchangeably. But when it comes to student debt, consolidation generally applies to federal loans, while refinancing applies to private student loans.

  • Direct Consolidation Loan — If you have multiple federal student loans, you can combine them into a direct consolidation loan that makes debt repayment easier while giving you access to flexible repayment terms and loan forgiveness options. Consolidating federal loans may not lower your interest rate — your new rate will be the weighted average of your existing loan rates — but it will give you only one monthly payment to track.
  • Private student loan refinancing If you have private student loans, federal student loans, or both, you can consolidate them by refinancing them into a new private student loan that will pay off your existing loans. If you have good credit, refinancing may offer you better loan terms or a lower interest rate, which could save you money and help you pay off debt faster.

You can refinance private and federal student loans, but you should be careful when making the decision to refinance federal loans into a private loan. You will lose federal benefits and protections such as income-based repayment plans, loan forgiveness options, deferment, and forbearance.

If you’re working on forgiving a federal loan or have an unstable income, it might be best to stick with your federal student loans, as they have more payment relief options to fall back on. Private lenders may also offer certain benefits to borrowers, but these benefits vary and may not be as extensive as federal loan benefits.

Benefits of Federal Student Loan Consolidation

A federal direct consolidation loan allows you consolidate multiple federal loans into a single new loan. Direct consolidation loans have several advantages to consider, including:

  • Application is easy. You can apply for consolidation online or with a paper application, and you can usually complete the application in less than 30 minutes.
  • You can simplify loan repayment. A direct consolidation loan gives you fewer payments to manage, which can make it easier to track your payment due date and make your loan payments on time.
  • Obtain loans in the event of default. If you have federal loans in default, consolidating your loans could bring your loans back into good standing so you can once again enjoy borrower benefits, such as deferment and forbearance.
  • Choose flexible repayment options. Repayment terms are up to 30 years, and choosing a longer loan term can lower your monthly payments. Direct Consolidation Loans may also qualify for Income Contingent Repayment (IDR) plans that set your monthly payment at 10% to 20% of your Discretionary Income.

Disadvantages of Federal Student Loan Consolidation

Consolidating your debt with a direct consolidation loan also has some downsides to consider, including:

  • Extending the term of the loan can affect your budget for years. Choosing a longer loan term may lower your monthly payment, but it could result in you paying more interest over time. Additionally, having student loan debt for decades could affect your ability to achieve other financial goals.
  • Rules apply when consolidating defaulted loans. To consolidate defaulted loans, you must first make three consecutive on-time payments on these loans, or you must enroll in an income-driven repayment plan.
  • Unpaid interest on existing loans will be capitalized. If you have unpaid interest on your federal loans, that interest will roll into your new consolidation loan balance and interest will be charged on that higher balance.
  • You may lose credit for payments you made for loan forgiveness. If you are already on an IDR plan, the payments you made for loan cancellation will not count when you consolidate a new loan, so you will have to start from scratch. Previously, payments made for the cancellation of public service loans (PSLF) also did not count after consolidation. But as part of temporary relief in the wake of the COVID-19 pandemic, you may continue to receive credit for past payments to PSLF for a limited time, even after consolidation. The COVID-19 payment relief measures have been extended until August 31, 2022.

Benefits of Private Student Loan Refinancing

You cannot consolidate private student loans into a direct consolidation loan. But private student loan refinance (sometimes called a private student loan consolidation) is an option to facilitate repayment. Here are some benefits of refinancing private student loans:

  • Simplify payments. Private student loan refinancing can combine multiple student loan payments into one monthly payment.
  • Lower your interest rate. If you have good credit, you may be able to refinance your private student loans into a lower interest rate loan, which could help you pay off your debts faster.
  • Delete a co-signer. Refinancing your loans could help free up a parent or loved one who agreed to co-sign your original student loan.

Credible, it’s easy to compare private student loan refinance rates from several lenders. It only takes a few minutes and it won’t affect your credit score.

Disadvantages of Private Student Loan Refinancing

Before you refinance student loans, consider some of the downsides:

  • You generally need good credit. You generally need good credit to qualify for student loan refinancing. Good to excellent credit will also earn you the best rates. That said, if you have limited credit or no credit, you may be eligible for a student loan refinance with a co-signer.
  • Payment waiver may not be available. Private lenders may not offer benefits such as forbearance or deferment if you are going through hard times. Check with the lender to ask if they offer payment relief options.
  • You may not qualify if you have high debt balances. You will likely need a debt-to-income ratio (DTI) of 50% or less to be eligible for refinancing. The DTI is a ratio that shows what percentage of your income is spent on paying down debt each month. If a large portion of your income is spent on credit card and loan payments, you may not qualify for refinancing. You can calculate DTI by adding up all your monthly debt payments, dividing that total by your gross monthly income, and multiplying by 100.

How to apply for loan consolidation or refinancing

The application process will vary slightly depending on your lender and whether you are consolidating federal loans or refinancing private loans.

How to Apply for a Federal Loan Consolidation

You can apply for a federal direct consolidation loan by visiting The app lets you choose the loans you want to bundle and select repayment options.

Your loan manager will take care of the consolidation from there, and you should continue to make payments on your old loans until you get confirmation that they’ve been paid off.

How to Apply for Private Student Loan Refinance

For refinance your student loans, you need to shop around for private lenders to compare rates and submit an application. The application process will likely involve a credit check and your interest rate will be set based on your credit history.

Having good credit can help you get competitive interest rates and long-term savings. Shopping around and getting quotes can help you find the best loan you can qualify for based on your credit profile.

If refinancing your student loans is right for you, visit Credible for compare private student loan refinance rates from multiple lenders in minutes.

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