How to consolidate private student loans into federal loans

Do you feel weighed down by student loan debt? If so, you might consider consolidating or refinancing your loans to lower your monthly payments. In many cases, that can be a smart financial move. But before deciding to consolidate or refinance, it pays to take a close look at the pros and cons.

Federal student loan payments, including principal and interest, are automatically suspended through Dec. 31, 2022. The Department of Education stopped the collection of defaulted federal student loans or loans in nonpayment. Garnishment of wages and any offset of tax refunds and Social Security benefits have also been stopped through Dec. 31, 2022.

The loan payment suspension began as part of the pandemic response in March of 2020 and was instituted by former President Trump and the Department of Education.

Key Takeaways

• Consolidating, or refinancing, high-interest private student loans into a single loan with another private lender can lower your monthly payments.
• Student loan payments are suspended on federally held student loans through Dec. 31, 2022.
• If you have federal student loans, another option may be to consolidate them through the government's Direct Loan Program.
• If you consolidate federal loans into a private loan, you will lose some of the special benefits that federal loans have to offer.

How Does Student Loan Consolidation Work?

There are two basic ways to consolidate your student loans. You can do so through a private lender or the federal government. Only federal loans are eligible for federal consolidation.

In the case of a private student loan consolidation (often referred to as refinancing), a private lender, such as a bank, pays off your private or federal student loans. It then issues you a new loan at a new rate and with a new repayment schedule. Refinancing makes the most sense if you have high-interest private loans and can obtain a significantly lower rate or better terms with the new loan.

However, with federal student loans, you have another option, which is to combine them into a new direct consolidation loan, through the Federal Direct Loan Program. Your new interest rate will be the weighted average of your previous loans, and you will remain eligible for some of the special features of federal loans.

While you can't consolidate private loans into a federal loan, if you have both private and federal loans, you can consolidate the private ones with a private lender and the federal ones through the government program.

If your student loan is still within its grace period, wait until that ends before you refinance it.

Advantages and Disadvantages of Student Loan Consolidation

Here's a look at the major pros and cons of both private and federal loan consolidations.

Pros

Lower Monthly Payments

Private loan consolidation can help reduce your monthly loan payments by offering you a lower interest rate. This means lower payments overall and saving you money over the life of the loan. Many graduates also find that they can get better interest rates because their credit scores improve over time.

Another way that a private consolidation or refinancing can cut your monthly payments is by extending the length of your loan. For example, if you refinance a 10-year student loan into a 20-year loan, you will see a dramatic cut in your monthly payments. But signing up for a longer loan also comes with a big caveat, as we explain a little later on.

You may be able to reduce the monthly payments by consolidating your federal loan if you qualify for one of the government's income-based repayment plans. These plans set your monthly payments according to how much you earn or how much you can afford to pay.

Fewer Monthly Payments

Keeping track of multiple student loan payments, on top of all your other bills, can be a hassle. Consolidating your student loan debt can help you reduce your bills to just one (or two, if you consolidate your private and federal loans separately, as is advisable).

Many private lenders even offer a slightly lower interest rate if you enroll in an automatic payment plan. This option saves you a small amount of money each month, and it helps you to avoid ever forgetting a payment.

Flexible Repayment Terms

When you consolidate your loans with a private lender, you can choose how long you want the loan to last and whether it carries a fixed or variable rate. Choosing a variable rate can be riskier since rates can go up anytime, but it can also get you a lower interest rate at the start of the loan. Federal consolidation loans carry a fixed interest rate.

Releasing a Cosigner

Another benefit of refinancing your private loans is that you might be eligible to sign for the loan on your own. Dropping a cosigner, who is typically a parent or another close family member, not only gets them off the hook for your debt, but it may raise their credit score and allow them to access new lines of credit if they need to. Federal loans don't typically involve cosigners.

Cons

You Could Pay More in the Long Run

While a longer-term loan can mean lower monthly payments, you could end up paying tens of thousands of dollars more over the life of the loan because of the accruing interest.

You Could Lose a Federal Loan's Advantages

If you consolidate a federal student loan with a private lender, you'll lose the option to sign up for an income-based repayment plan. You'll also no longer be eligible for federal loan forgiveness and cancellation programs. These are major reasons to consolidate your federal loans only through the federal program.

Any Existing Grace Periods May Go Away

As soon as you take out a refinanced loan with a private lender, you must start repaying it. With many student loans, you can delay payments while you are still in school or if you have entered a graduate program. If your current loan is still within its grace period, wait until that period ends before starting the refinancing process.

Pros

• You'll have lower monthly payments.

• You'll make fewer monthly payments.

• Repayment terms can be flexible.
  

• You can release a cosigner from the loan.
  

Cons

• You could pay more in the long run.

• You could lose a federal loan's advantages.

• Any existing grace periods may go away.

How to Consolidate Student Loans

You can consolidate your student loans through many financial institutions, including your local bank or credit union, in addition to lenders that specialize in these types of loans. Among the well-known names in the field are Earnest, LendKey, and SoFi.

You can find more information about the steps for consolidating your federal loans on the Department of Education's Federal Student Aid website.

Is It Smart to Consolidate Your Student Loans?

Yes, it can be a smart move to consolidate your student loans if you have loans from multiple service providers. Consolidation allows you to have one loan with one monthly payment, which is easier to manage. Consolidation may also result in a lower interest payment. Another benefit that consolidation could provide is by giving you a longer time frame in which to pay back your loans, thereby reducing your monthly payment. This may increase the total interest you pay on your loan, however.

Does Student Loan Consolidation Hurt Your Credit?

Federal student loan consolidation does not hurt your credit because there is no credit check with federal consolidation. If you consolidate your loans via a private lender, then there may be a temporary drop in your credit score because the lender will do a hard check on your credit; however, your credit may also then benefit from consolidation if you end up with a lower interest rate and lower monthly payments.

What Student Loans Cannot Be Consolidated?

Private student loans cannot be consolidated. Direct PLUS loans, which are loans that parents take out to pay for their children's education also cannot be consolidated with the other student loans that are in the child's name.

The Bottom Line

Consolidating your multiple student loans can be an easier way to manage the debt that you owe. It may also lead to lower interest rates. If you feel that the costs and keeping up with your student loans has become difficult, looking into consolidating them may ease your burden. Before doing so, it's worth looking at the pros and cons of consolidating.

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