How to Consolidate Multiple Student Loans into One Simple Loan

ByBestmoney StaffDec. 31, 2020
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Students hallway
If it feels like your student loan debts are spiraling out of control, reorganization might be all that’s needed to fix things.

Today 45 million Americans—almost 1 in every 5 adults–carry a combined student debt of $1.4-$1.6 trillion, according to various estimates from Experian and the New York and St. Louis branches of the Federal Reserve.

Throw in the fact that the average American has four credit cards, not to mention mortgages, car loans, and any number of other lending products, and it’s only natural that many people find it hard to manage all their payments. 

Thankfully, there’s an easy way to reorganize and manage multiple loans: consolidation. When it comes to student debt, there are a few consolidation options to consider.

Consolidation vs. Refinancing

Before we go on and explore the options, it’s important to set the record straight on what the terms consolidation and refinancing actually mean. These 2 terms tend to get used interchangeably when the topic of student loans is being discussed. Although there are similarities, consolidation and refinancing are not technically the same thing.

Consolidation is literally the joining together of many things into 1 whole. In the case of student loans (or loans in general), it refers to the process of turning multiple loans into one loan. Instead of having several separate student loans with separate monthly payments and billing statements, consolidating allows you to manage everything under 1 monthly payment. Consolidation sometimes, but not necessarily, involves a better interest rate or cheaper monthly payments than the original loan.

Refinancing refers to the reorganization of a loan on fresh terms, ideally with a lower interest rate and cheaper monthly payments. Refinancing can theoretically include consolidation in that you can consolidate multiple loans into a single loan and secure better repayment terms on the new loan.

Our Top 3 Student Loan Refinance Options

Credible Rates starting at:
1.93% (with autopay)*
Earnest Rates starting at:
1.99%
Splash Financial Rates starting at:
1.89%

Still confused? Let’s look at the various student debt consolidation and refinancing options.

Option #1 – Federal Government Debt Consolidation Loan

Pros
Cons
Simplifies federal student loans into 1 payment     Usually involves higher overall interest over the life of the loan
Potentially lower monthly payment Loss of borrower benefits, e.g. interest rate discounts, loan cancellation, forgiveness programs.
Option of switching variable-rate loans to fixed rate loans Loss of credit for any payments made toward income-driven repayment

A Direct Consolidation Loan is a type of loan offered by the federal government that allows a person to consolidate multiple federal education loans into 1 loan. This option may only be used to consolidate federal loans and cannot be used on private loans. A Direct Consolidation Loan offers the benefit of a single monthly payment instead of multiple payments. It can give you access to new loan repayment plans and loan forgiveness programs. However, it may involve loss of benefits attached to your original loans, which also include forgiveness programs and interest rate discounts.

A Direct Consolidation Loan has a fixed interest rate for the life of the loan. The fixed rate is the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth of one percent. Unlike refinancing, a Direct Consolidation Loan does not offer the option of a lower interest rate than the original loan. However, because a Direct Consolidation Loan involves a potentially longer repayment term (up to 30 years), it may have the effect of lowering your monthly payment.

Most federal student loans are eligible for consolidation, including the following:

  • Subsidized Federal Stafford Loans
  • Unsubsidized and Nonsubsidized Federal Stafford Loans
  • PLUS loans from the Federal Family Education Loan (FFEL) Program
  • Supplemental Loans for Students
  • Federal Perkins Loans
  • Nursing Student Loans
  • Nurse Faculty Loans
  • Health Education Assistance Loans
  • Health Professions Student Loans
  • Loans for Disadvantaged Students
  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • Direct PLUS Loans
  • FFEL Consolidation Loans and Direct Consolidation Loans (only under certain conditions)
  • Federal Insured Student Loans
  • Guaranteed Student Loans
  • National Direct Student Loans
  • National Defense Student Loans
  • Parent Loans for Undergraduate Students
  • Auxiliary Loans to Assist Students

Option #2 – Refinance with a Private Lender

Pros
Cons
Lets you consolidate federal and student loans Loss of benefits associated with federal student loans, e.g. forgiveness plans
Potentially lower interest rate and lower monthly payments Strong credit required (generally 620-680+) to qualify and get a good rate
Option of dropping cosigner Application can impact credit score

A student loan refinance involves replacing one or more federal and/or state and/or private student loans with a single new loan from a private lender. A student loan refi involves fresh loan terms with (ideally) a lower interest rate and lower monthly payments. For borrowers with excellent credit, private lenders are known to offer student loan refis with APRs as low as 2.5%. The larger your existing student debt, the greater the savings you can accrue by securing a lower rate.

If you refinance 1 student loan with fresh terms, then it is technically just a refinance. But if you refinance 2 student loans, combining them into one loan with fresh terms, then it is also a consolidation. The greatest benefit of refinancing with a private lender is that you can use it to combine federal and private loans into one new loan. Another benefit is the potential for significantly lower interest rates—and therefore bigger saving—than the federal government’s rates. For example, Credible says its refinancing customers save $11,000 on average on total interest payments.

On the flipside, it should be noted that private student loan refinance providers are known for having strict credit requirements. Overall, it’s been estimated that only around 10% of Americans with student debt would qualify for a student loan refinance. Generally speaking, lenders will only approve borrowers with at least 620 or in some cases 680 credit and high income.

Option #3 – Explore Other Alternatives

Although government consolidation loans and private student loan refinancing are the 2 most common options, there are a few alternatives. One option is to borrow the money from another source, such as an unsecured personal loan or home equity loan and use the funds to pay off your student debt. Of course, this would then require you to pay off your new loan. A personal loan or HEL only really makes sense if you can somehow secure a deal that saves you more money than the standard options. It’s generally easier to get approved for a personal loan than a student loan refinance, but the rates are usually higher and—like a refinance—it also involves loss of benefits attached to federal student loans.

Another option to know about is using a state refinancing program, offered in 12 states: Alaska, Connecticut, Iowa, Kentucky, Louisiana, Massachusetts, Minnesota, New Hampshire, New Jersey, North Dakota, Rhode Island, and South Carolina. The rules for state refinancing programs vary, but generally they can be used to consolidate and refinance the terms of your old student loans.

Top Student Loan Refinance Options

Credible

  • Compare different loan options
  • No fees

In addition to being a leading option for personal loans, Credible offers competitive rates for student loan refinancing as well. It is a loan marketplace working with some of the most well-known and most reliable loan providers in the industry. With a modern approach to student loans, and outstanding customer service, Credible is an ideal solution for those who want to weigh their options.

Read the full Credible review

Credible Credible View Rates

Splash Financial

  • No prepayment penalties
  • No application fees

Splash Financial is a rookie player making home runs with student loan refinancing. It offers low rates, an easy to navigate website, flexible repayment schedules and special rates for medical residents.

Read the full Splash Financial review

Splash Financial Splash Financial View Rates

How to Choose the Right Consolidation Option

Before deciding how to consolidate, consider your level of student debt, types of student debt, and how much risk you’re willing to take. 

If you have federal student loans, a Direct Consolidation Loan is a low-risk option that makes your monthly payments more manageable and allows you to retain some benefits. However, it won’t improve your interest rate.

If you have private loans or a combination of private and federal loans, it’s worth considering a private student loan refinance. (In fact, it may be your only option, given that the federal government doesn’t consolidate private loans). If you have strong credit and strong income, then you should be able to qualify for a refinance—and potentially save thousands in the process. However, be aware that it means giving up on the benefits attached to having federal loans.

When looking for a private student loan refinance, always remember to shop around. Doing a comparison of 3-5 lenders is a good way of finding attractive rates and learning which lender is right for you.