How Student Loan Consolidation Works

student loan consolidation
Consolidating student loans combines multiple loans under one umbrella so you can make just one payment. Xsandra/Getty Images

It's estimated that two in three college students who graduated in 2018 left school with student loan debt, according to The Institute for College Access & Success. Given that tuition at some of the more prestigious universities can reach nearly $60,000 per year, and even a public community college two-year degree can cost more than $15,000, college loan debt can be overwhelming.

Considered on a national level, student loan debt becomes staggering. Currently, 45 million American borrowers owe more than $1.56 trillion in student loan debt, according to Student Loan Hero. Americans have 70 percent more student loan debt than credit card debt.


A significant factor responsible for the exponential growth in student loan debt is interest. Think about it. You borrow $15,000 at 6.8 percent per year to pay for a two-year degree in automotive technology. When you graduate, you'll have 10 years to pay, or roughly 120 payments of $172 and change. When you're done, you'll have shelled out roughly $20,000 to pay for the loan and interest.

Sadly, this represents a mild example. Among households with student loan debt, the average owed is more than $46,000, according to a 2019 study by NerdWallet.

Let's up the ante. Shoot for a four-year degree at an expensive university or college, and according to statistics, you'll likely have about $50,000 in loans when you graduate. With the same interest rate and loan payment period, you're looking at a monthly payment of about $575 and total interest of about $20,000 for a total principal and interest of $70,000.

While making the payment is daunting enough, you're likely to end up with several different student loans, all with different payment structures, interest rates and formulas. Even if you have all federal direct loans and just one servicer, your loans can be "grouped" and require separate payments.

This is where student loan consolidation comes in. In short, it's a way of grouping disparate loans under one umbrella and making a single payment via one loan servicer. But "consolidation," while having a specific meaning, is more of a general industry term and can be used loosely to refer to a few different strategies.

What's more, student loan consolidation can be a good idea for some, and a bad idea for others. Read on for more information on consolidating student loans.


What Is Student Loan Consolidation?

student loan consolidation
If you have multiple federal student loans, consolidating them into one could help reduce your monthly payment. Anchiy/Getty Images

Student loan consolidation has changed significantly in the past decade, and more changes may be on the horizon. Currently, a student loan consolidation refers to combining multiple federal education loans into one loan. Called a direct consolidation loan, it is performed by the U.S. Department of Education and requires no application fee. If you receive an offer for a "loan consolidation" that charges a fee, that is from a private lender offering the service.

Only federal student loans are eligible for direct loan consolidation. Private student loans cannot be incorporated into a federal loan consolidation. If you have both federal and private student types, you can still consolidate all of your federal loans with a direct loan consolidation. You may also be able to refinance your private loans with your existing lender or another lender. As a third option, you can refinance your federal and private loans together with a private lender. Just keep in mind, consolidating a federal loan to a private will change your loan terms significantly. Each option comes with benefits and drawbacks.


With a college education more expensive than ever, many students will find themselves graduating with a degree, but also with a large, complex debt. Student loan consolidation can make dealing with the mechanics of that debt a little easier. Here are a few reasons why consolidating student loans might be a good idea:

  • You'll have the advantage of paying just one servicer rather than several.
  • Consolidation can lower your monthly payment.
  • You might gain access to new repayment plans, especially a variety of income-driven repayment plans, some of which end in loan forgiveness.
  • You can lock in a fixed interest rate.

So when (and if) student loan consolidation is possible is something each customer needs to look into on an individual basis. But there are a few general tips to following when considering loan consolidation:

  • Consolidating student loans is ideal when the loans begin coming due, generally six months after graduation, or within the same period of when a student stops attending school.
  • Today, student loans are tied to a fixed rate rather than the variable prime. Depending on the rates of your existing loans and today's current student loan interest rate, consolidation, if possible, could mean a lower interest rate.
  • Income-driven repayment plans have a forgiveness feature, which eliminates the outstanding balance on federal student loans after a specified number of years of on-time payments — generally 20 to 25. The Public Service Loan Forgiveness (PSLF) program can bring the consecutive payments to 120 for borrowers employed full time for a federal, state, local or tribal government or a nonprofit.

Overall, weighing your economic situation versus the terms of the loan is beneficial in determining whether you want to consolidate your loans.


Are My Student Loans Eligible for Consolidation?

student loan consolidation
Most federal student loans are eligible for consolidation by the U.S. Department of Education, and it doesn't cost you anything. Phynart Studio/Getty Images

Before considering student loan consolidation, you will need to find out if they're eligible. Most federal student loans are, including outdated loans that aren't even offered anymore.

That's because one of the major changes that has taken place in the past decade is today all federal student loans are now direct loans from the Department of Education. While the Department of Education is the lender, it uses several loan servicers to collect payments. There are nine loan servicers listed on the department's Federal Student Aid website, including Nelnet, OSLA Servicing and Navient. Think of these servicers like the management company that runs an apartment complex but does not own the building.


Although student loan consolidation might once have been complicated, currently the application is online and the process is simple. You can choose which federal loans you want to consolidate and which you do not. If you are in a grace period, meaning you are not currently in repayment, you can delay your loan application to coordinate timing with the end of the grace period.

The Department of Education will verify your loan balances with the National Student Loan Data System (NSLDS) and send you a notice for the pay off.

For the most part, if you fall below half-time enrollment or are not in school, you can consolidate your existing loans. If you return to school later and take out more loans, you can do another consolidation when you leave again.

However, your loans must either be in repayment or a grace period. You cannot be in default. In that case, you will usually need to get your payments on track or agree to switch to one of the income-driven repayment plans with your consolidation.

In the next section, we'll examine some of the downsides of consolidation and why it's good to have that information on hand before making any decisions.


The Downsides of Student Loan Consolidation

student loan consolidation
There are some drawbacks to consolidating student loans, so you should always check with a student loan adviser to be sure the benefits outweigh the disadvantages. martinedoucet/Getty Images

Consolidating your student loans — whether they're federal of private — is the equivalent of creating a new loan, so there are times when it might not be beneficial.

Here are a few things to consider before consolidating student loans:


  • Consolidation typically increases the period you have to repay your loans, which might sound like a good thing, but that means you'll make more payments and pay more in interest, too.
  • Also, any outstanding interest on loans you consolidate gets tacked onto to balance of the new loan's principal. That can translate into more accrued interest over time, too.
  • Finally, if you lose any special benefits like interest rate discounts or principal rebates associated with your current loans if you consolidate, you might want to reconsider.
  • Consolidating federal loans is free. However, there may be charges to consolidate and refinance multiple private student loans. Private loans are also usually tied to your credit rating, and a poor credit rating can mean higher fees, and higher interest rates.

Loan consolidation is never cut and dried. It's a financial tool that comes with risk, and you have to determine how that tool can be used to your benefit. The best way to understand the advantages and disadvantages is to talk to a financial professional or student loan adviser — someone who understands the ins and outs of student loans.

The best advice is to understand what you will be paying before you even consider student loan consolidation. As they said in high school, "Don't forget to do your homework." In this case, it just may get you on your way to a better financial future.

For more information about loan consolidation and other related topics, check out the links below.


Lots More Information

Related Articles

  • Federal Student Aid, Student Loan Support Center. Personal call. "U.S. Department of Education." Feb. 18, 2020.
  • Federal Student Aid. "How much can I borrow?" U.S. Department of Education.
  • Federal Student Aid. "Should I consolidate my loans?" U.S. Department of Education.
  • Federal Student Aid. "Repaying Your Loans." U.S. Department of Education.
  • Federal Student Aid. "What types of federal student loans are available?" U.S. Department of Education.
  • Federal Student Aid. "What's the difference between Direct Subsidized Loans and Direct Unsubsidized Loans?" U.S. Department of Education.
  • Friedman, Zack. "Expect These Student Loan Changes In 2020." Forbes. Oct. 28, 2019.
  • Gonzalez, Veronica. "Student Debt and the Class of 2018." Institute for College Access and Success.
  • Issa, Erin. "2019 American Household Credit Card Debt Study." NerdWallet. Dec. 2, 2019.
  • Pentis, Andrew. Personal interview, Student Loan Hero
  • Christel, Patricia Nash. Managing Director of Communications for Sallie Mae. Personal Interview. Conducted March 18, 2010.
  • USAFacts. "Student Debt Explained: Breaking Down the $1.6T in Loans." U.S. News and World Report. Nov. 1, 2019.