By Matt Becker

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When I talk to people who are frustrated with their student loan debt and want to get rid of it as soon as possible, there’s one question that comes up over and over again:

Should I consolidate my student loans?

It’s a tricky question both because there are a lot of variables to consider and because there’s a lot of misinformation out there about exactly what student loan consolidation is and how it can help you.

So my goal here is to correct that misinformation and show you exactly what student loan consolidation is and when it can help you.

Specifically, we’re going to cover the following:

The difference between consolidation and refinancing

What student loan consolidation WON’T do for you

What student loan consolidation CAN do for you

Pitfalls to avoid when consolidating student loans

How to consolidate your federal student loans

When to consider private refinancing instead

By the end of this post, you will know whether consolidating your student loans is a good idea and how you can get started.

Student loan consolidation vs. refinancing

One of the main points of confusion is that the word consolidation is often used to mean EITHER consolidation OR refinancing.

But those are two very different things with very different pros and cons.

With respect to student loans, consolidation specifically refers to the Federal Direct Consolidation Loan program, which essentially allows you to turn one or more federal student loans into a different kind of federal student loan.

The main reason you would consider consolidation is it may give you access to the best federal student loan repayment plans. We’ll talk more about this below.

On the other hand, refinancing means taking out a new private loan to replace one or more federal or private student loans. The main reason to consider refinancing is the possibility of getting a lower interest rate.

They both have very different pros and cons, and very different situations in which they make sense. So understanding the difference is key to making the right decision for your specific situation.

Most of this post will be spent talking about the pros and cons of federal student loan consolidation. But there are times where refinancing is the right option and we’ll talk about those situations as well.

Quick note: Many private lenders will call their loans “consolidation” loans, which adds to the confusion. It’s just better to consider any new private student loan a refinance since the main benefit is the potential for a interest rate, and since consolidation has a specific meaning when it comes to federal student loans.

What student loan consolidation WON’T do for you

Before we talk about why you SHOULD consider consolidating your student loans, let’s quickly talk about what it WON’T do for you.

Consolidating won’t decrease your interest rate

The biggest misconception out there is that consolidating your student loans will lower your interest rate.

It won’t.

After consolidating, your new interest rate is the weighted average of all the loans you chose to consolidate. In other words, your combined interest rate will be exactly the same as it was before.

Actually, it might be slightly higher, since your interest rate will be rounded up to the nearest 1/8%. Not a huge increase, but a potential increase nonetheless.

For a quick example, let’s assume you have two student loans. One has a $10,000 balance and a 4% interest rate. The other has a $20,000 balance and an 8% interest rate.

If you consolidated those loans, you would end up with a single $30,000 loan with a 6.75% interest rate.

Consolidating won’t make payments easier

In the past, people often had to deal with multiple loan servicers for multiple federal student loans. That meant multiple bills to track and people to pay in order to keep everything in order.

It also meant that consolidation was appealing for the simple fact that it made things easier. With only one servicer to pay, life got a lot less complicated.

But for the most part that’s no longer an issue. You can typically handle all of your federal student loans from the same online login, so consolidating usually doesn’t make things any easier.

What student loan consolidation CAN do for you

With that out of the way, let’s talk about the main reasons why you SHOULD consider consolidating your student loans.

1. Qualify for income-driven repayment plans

For most people, this would be the main reason to consolidate your student loans.

The government has introduced several income-driven repayment plans over the years that can not only decrease your required monthly payment, but may even lead to some of your debt being forgiven.

These repayment plans can be incredibly helpful in the right circumstances, particularly for people who have a lot of student loan debt compared to their income.

The catch is that only certain types of federal student loans qualify for these income-driven repayment plans.

Before 2010, federal student loans used to be given out in two different ways. You either received a Direct loan directly from the federal government, or a FFEL loan from a private company.

Only Direct federal loans qualify for the best income-driven repayment plans like Pay As You Earn and Income-Based Repayment.

But if you have FFEL loans, you can turn them into Direct loans through consolidation and open up the possibility of qualifying for those repayment plans.

And you don’t even need more than one loan to do it. You can consolidate a single FFEL loan, all by itself, to make it eligible.

Bottom line: if you have FFEL loans and want to use one of those income-driven repayment plans, consolidation is your route to doing it.

2. Lock in a low, fixed interest rate

If you borrowed before July 1, 2006, your federal student loans may have a variable interest rate that changes every year.

And while it’s nice when your interest rate decreases, the risk is that it will eventually increase and you’ll be stuck with a higher monthly payment than you’d like.

Enter consolidation.

By consolidating those variable rate loans, you can lock in a fixed interest rate so that you know exactly what you’re going to pay each month for the life of the loan. And since interest rates are historically low right now, this could be a good time to do it.

3. Get out of default

If your federal student loans are in default, you have a lot of things to consider. This guide can help you get started, and you can also check out the Student Loan Borrower Assistance site.

One of your options is to consolidate your way out of default. There are some hoops to jump through, and you can only do this once in your lifetime, so you need to be reasonably sure that you won’t find yourself back in default in the near future.

But in the right situations, this can make a lot of sense.

Pitfalls to avoid when consolidating student loans

If you’re in one of those three situations, it can make a LOT of sense to consolidate your student loans. You might end up saving yourself a whole lot of money.

But there are a few pitfalls that could prevent you from getting the maximum benefit.

Here are the main traps to avoid.

Consolidating Parent PLUS loans with others

Parent PLUS loans are NOT eligible for the best income-driven repayment plans, even after they’re consolidated.

Which means that you should almost NEVER consolidate a Parent PLUS loan with your other federal student loans. Otherwise the main benefit we talked about above would be lost.

So if you’re going to consolidate, make sure you consolidate any Parent PLUS loans separately from your other federal student loans.

Mixing interest rates

Let’s say that you have two federal student loans, each of which has a $10,000 balance. One has an 8% interest rate and the other has a 4% interest rate.

If you consolidate them, you will end up with one $20,000 loan with a 6% interest rate, along with a lost opportunity to save money.

Remember that paying off your high interest rate debt first will save you money over the long term. And by keeping those loans separate, you can put all your extra money towards the 8% loan first and get to debt-free sooner.

If you combine them, you lose the opportunity to do that.

So if you have multiple loans with different interest rates, it can make a lot of sense to either avoid consolidation or to do multiple consolidations. You can still group loans that have similar interest rates, but if there are any big differences you will likely want to keep them separate.

Losing progress towards forgiveness

If you have already made progress towards forgiveness on any of your student loans, you may want to keep them out of any consolidation simply because that progress can be lost.

Extending your repayment period

Consolidating your student loans can lead to an extended repayment period, which means lower monthly payments and more room in your budget.

Unfortunately, it can also mean more money paid over the life of the loan, since you’re simply taking longer to pay if off. That extra cost needs to be weighed against the potential benefits.

Losing benefits of certain types of loans

Certain types of student loans, such as Perkins loans and health professions loans, have benefits that other federal loans don’t have. If you consolidate these loans, those special benefits are lost.

It still may be worth it, but it’s important to consider the trade-offs in light of your specific situation.

How to consolidate your federal student loans

You can start the consolidation process at StudentLoans.gov.

Before you start, you’ll want to have all your student loan information organized in one place. Here’s a guide on how to do that: How to Organize Your Student Loans.

You’ll also want to know which repayment plan to choose. You can figure that out here: Which Student Loan Repayment Plan is Right for You?

Finally, review the pitfalls above before making any final decisions, and don’t be afraid to reach out and ask for help if you need it. There are lots of great resources online, and you can also email me directly any time at matt@momanddadmoney.com.

When to consider private student loan refinancing instead

There are two types of situations where it may make more sense to refinance your student loans with a private lender.

Let’s talk about those two situations now, along with some specific private lenders you might consider.

Situation #1: You have high interest rate private loans (refinance away!)

Since you can’t consolidate your private loans into federal loans, refinancing is really your only option. And it has two big potential benefits:

Lower interest rate – This is especially likely if your credit score has improved significantly since the last time you borrowed. Better protections – New lenders have come onto the scene in recent years that offer much better borrower protections. I have a list for you down below.

Basically, if you can get a better interest rate and better protections at the same time, there isn’t much reason not to refinance your private student loans.

Situation #2: You have high interest rate federal loans (proceed cautiously!)

The decision gets a LOT trickier if you’re considering refinancing your federal student loans with a private loan.

Federal student loans offer MANY borrower protections that you just won’t find with private loans. This ranges from income-driven repayment plans and possible forgiveness to options like deferment when you’re in a tough financial spot.

The gap is shrinking a little bit with some of the new private lenders I’ll mention below, but private student loans are still NOT the same as federal student loans, and giving up those federal protections isn’t a decision that should be made lightly.

Still, there are some situations where it can make sense. Refinancing your federal student loans is most likely to be a good option for people who BOTH:

Have really good credit and therefore qualify for a low interest rate. Have a high, stable income that will make it easy to pay the loan off quickly.

So proceed with caution, but also know that in some cases refinancing your federal student loans can save you money.

Where to refinance

The private student loan market is basically the wild west. Every lender is going to offer different interest rates with different terms and conditions, many of which are very unfavorable for you, the borrower.

With that said, there are a few companies that have come onto the scene recently that seem to be changing that. Specifically, they offer some strong borrower protections that can help you out if you ever find yourself in a tough financial spot.

You’ll want to carefully read the terms and conditions yourself before making any decision, but here are a few companies to consider if you want to refinance your student loans:

You can also check out your local credit unions. These won’t be as standardized as the other options, but credit unions are owned by their members and therefore often have better terms than regular banks.

Should you consolidate your student loans?

As you can see, there’s hardly a single yes or no answer that works for everyone when it comes to consolidating your student loans.

But to make it as easy as possible for you, here’s my quick-hit summary of all of the above.

Consider student loan consolidation if you meet any of the following conditions:

You have FFEL loans and want to apply for income-driven repayment. You have variable rate federal loans and want to lock in a low, fixed rate. Your federal student loans are in default and consolidation is the best way out.

Watch out for these pitfalls when consolidating your student loans:

Consolidating Parent PLUS loans with other types. Mixing interest rates. Losing progress towards forgiveness. Extending your repayment period. Losing the special benefits of certain types of loans.

And finally, consider private student loan refinancing in either of the following situations:

You have high interest rate private student loans and your credit score has increased significantly since the last time you borrowed. You have high interest rate federal student loans, an excellent credit score, and a high, stable income.