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What to know about consolidating federal and private student loans

Consolidating federal and private student loans gives you the ability to combine multiple loans into one and could save you money in interest over time.

If you’ve graduated with multiple student loans, you might consider combining them into one loan with a single monthly payment. Depending on the types of loans you have, there are two different ways you can do this. 

You can consolidate federal loans using a special program through the U.S. Department of Education. With private loans, you’ll need to refinance. While the two approaches are similar, it’s vital to know the difference before you turn in a loan application. This article will go over student loan consolidating and refinancing and when you might choose one over the other.

Credible makes it easy to compare student loan refinance rates from multiple lenders.

Student loan consolidation refers to combining multiple federal student loans using a Direct Consolidation Loan through the U.S. Department of Education. 

Your current federal loans are combined into a single loan with one monthly payment, and the fixed interest rate you pay is the weighted average of the interest rates on your current loans. This means you won’t save money on interest, but you may have access to different repayment plans under your new consolidation loan — including income-driven repayment or an extended repayment term. 

You’ll also keep the benefits federal loans provide, including deferment options and loan forgiveness (if you qualify for it). If these are important to you, you’ll likely want to consider consolidation rather than refinancing.

Student loan refinancing is similar. You apply for and take out a new loan from a private lender to pay off your current student loans, leaving you with a single loan with one monthly payment. 

Private loans must be refinanced rather than consolidated, but you can also choose to refinance federal student loans into your new private loan. The interest rate on your student loan refinance may be lower than the rates you’re currently paying, depending on your financial situation and market conditions. That means you could save money on your monthly payment. 

If you primarily have private student loans and qualify for a lower interest rate, you’ll likely want to consider refinancing your loans.

To consolidate your federal student loans, you’ll apply for a Direct Consolidation Loan through the U.S. Department of Education. You can do so online, or you can choose to print out an application and mail it in. There are no application fees or costs associated with a consolidation loan. 

You generally become eligible to consolidate your federal loans after you graduate or leave school, or become a part-time student taking less than half of a standard course load. Your current loans must be up to date on their payments, or you must have a new repayment plan in good standing or be willing to use an income-driven repayment plan. 

During your Direct Consolidation Loan application, you’ll choose a repayment plan for your new loan. This could be a standard plan with fixed payments that will satisfy your loan within 10 to 30 years. You might also choose a graduated repayment plan, with payments that start low but increase over time, or an income-driven repayment plan where you pay a fixed percentage of your discretionary income.

If you think private student loan refinancing is right for you, you can compare prequalified rates from multiple lenders using Credible.

Refinancing your student loans involves taking out a new private student loan to pay off and replace your current loans. Many lenders offer refinancing options. 

You’ll apply for the loan, go through a credit check and get an offer for an interest rate and loan terms that you qualify for. If you accept the loan, the money goes to pay off your current loans. You’re left with a single new loan.

Both federal student loan consolidation and student loan refinancing combine multiple student loans into one with a single monthly payment. In both cases, you’ll start with a loan application — either to the U.S. Department of Education or to a private lender. 

Before moving forward, take stock of your current loans, the repayment plans you’re on, the monthly payment you make and the interest rates you pay. Be especially cautious before refinancing federal student loans into a private loan. It may become clear that one method of consolidating your loans may work better for you. 

To find your prequalified rates for refinancing multiple student loans, visit Credible and compare loans from multiple lenders.

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