How to Consolidate Student Loans

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Last Updated: October 11, 2022 References

Most students need to borrow money to pay for college, and many struggle to make their payments after graduation. If you are juggling more than one payment on your loans (whether they are federal, private, or both), or if your federal loans are currently in default status, consolidation may help you manage your debt and protect your credit. You may pay more in the long run, but for now, you’ll be able to make just one monthly payment – and it may be considerably lower than your current loan payments.

Method 1

Method 1 of 3:

Making the Decision to Consolidate Your Student Loans

1
Get a clear picture of your overall debt. Student loans can be confusing (you might have any combination of Stafford, Perkins, PLUS, and other federal loans, and you might also have private loans), and many borrowers don’t have an accurate sense of what they owe and to whom they owe it. Check your records, and make sure you have a complete list of all your loans, who services them, and what your current monthly payments are – whether you have actually been making those payments or not.
- If you are unsure about your federal loans, visit the National Student Loan Data System. This site will allow you to see all of your federal financial aid records.
- If you are unsure about your private loans, follow up with the appropriate lender or lenders. They will provide documentation about what you owe and what the terms and conditions of your loans are.
2
Assess your current situation. Once you have accurate, complete records, ask yourself whether you need to consider consolidation. Are you currently making your payments on time? Can you afford those payments? Are any of your payments delinquent? Are any of your federal loans in default status (meaning that you have not paid for 270 days)? If any of the following situations apply, you may be a good candidate for consolidation:
- Your federal loans are in default. Consolidation will move them out of default status and minimize the effect on your credit rating.
- Your private loans are delinquent, and you are unable to get caught up. Consolidation will help you get the debt under control and minimize the long-term damage to your credit.
- You are making payments that you cannot afford, and you are worried that you will wind up delinquent or in default. Consolidation may help you get a lower monthly payment so that you can keep your loans current.
- You are making multiple monthly payments on different loans and want to simplify the process. Consolidation will allow you to make just one payment, if your loans are either all federal or all private. If you have both, you’ll have two payments, as you can’t consolidate them together.
3
Understand the potential disadvantages of consolidation. Consolidation does have a downside. Lower monthly payments mean that you’ll likely wind up making those payments for more years, and you’ll pay more in total. In addition:^{[1]
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- For private loans, a fee of up to 18.5% of your loan balance may be added to your principal.
- Your interest rate may increase. Federal interest rates are capped at 8.25%, but that’s still quite high, especially when you consider that you may be paying for decades. Private lenders’ rates vary, but in general, consolidating your loans may entail a rate increase.
- You may lose benefits associated with specific loans. Consolidating eliminates your previously existing loans completely and merges them together under a new loan with different terms and conditions. Certain benefits, including principal rebates or interest rate discounts, will not carry over.
- You won’t be able to “unconsolidate” your loan. Once you’ve completed the consolidation process, you can’t go back to your previous situation. You could find yourself stuck with less-than-ideal terms and conditions.
4
Decide who to contact. For federal student loans, there’s no question – you are better off consolidating with the Department of Education, where interest rates are capped and you keep your access to programs like deferment, forbearance, and forgiveness. For private loans, you’ll have to shop around, comparing servicers like Chase, NextStudent, Student Loan Network, and Wells Fargo, which are highly rated by Forbes.^{[2]
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- As you compare consolidation loans with various private companies, pay particular attention to the interest rate – this will make a huge difference in how much you wind up paying overall.
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Method 2

Method 2 of 3:

Consolidating Your Federal Student Loans

It’s important that you continue making your existing payments as you complete the consolidation process. Until you’ve been informed that your loans have been paid off and your consolidation loan has taken effect, you are legally required to make those payments.^{[3]
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2
Determine whether your loans qualify for consolidation. Most federal student loans do qualify, but it’s important to make sure that all of your individual loans will be included. The following loans qualify:
- Direct Subsidized Stafford Loans
- Direct Unsubsidized Stafford Loans
- Direct PLUS Loans
- PLUS loans from the Federal Family Education Loan (FFEL) Program
- Supplemental Loans for Students
- Federal Perkins Loans
- Federal Nursing Loans
- Health Education Assistance Loans
3
Apply online. Go to https://studentloans.gov/myDirectLoan/index.action. The application process is simple, since the Department of Education will already have all of your personal information and records of all your federal loans.^{[4]
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- Again, you should avoid consolidating your federal loans through private lenders. If you do not stay with the Department of Education, you’ll lose access to many resources and benefits, and you will probably pay more.
4
Read your summary sheet carefully. Once you’ve completed the application process, the Department of Education will provide you with a summary sheet, which lists all of the loans you are consolidating. Review this document carefully.^{[5]
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- If everything looks correct, you don’t need to do anything. After fifteen days, the Department of Education will process your loan.
- If anything looks amiss – if the numbers are off, or if any of your federal loans aren’t included – contact the Department of Education within fifteen days of the date on the summary sheet.
5
Make arrangements for repayment. Once your consolidation loan is approved, you must choose a repayment plan. If any of your loans were in default, you’ll choose one of the three income-based options – either IBR, Pay-As-You-Earn, or ICR. If none of your loans were in default, you can choose any of these six plans:^{[6]
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- Standard Repayment. You’ll make regular payments that are calculated so that your loan will be paid off within ten years. Many people who consolidate find that they cannot afford the standard plan, but if you can, it’s the most cost-effective option.
- Graduated Repayment. You’ll make payments that start out low and increase every two years, so that you pay the entire balance in ten years. If you don’t make much money but expect your income to increase regularly with time, this is a solid, cost-effective option.
- Extended Repayment Plan. You’ll make lower payments, but you’ll continue making them for 25 years. This option is only available if your loan amounts to more than $30,000.
- Income-Based Repayment (IBR). You’ll make payments for twenty-five years, and after that, any remaining debt will be forgiven. Your payments will not exceed 15% of your discretionary income.
- Pay-As-You-Earn Repayment. You’ll make payments for twenty years, and after that, any remaining debt will be forgiven. As with IBR, your payments will not exceed 15% of your discretionary income.
- Income-Contingent Repayment (ICR). You’ll make payments for twenty-five years, and after that, any remaining debt will be forgiven. Your payments will not exceed 20% of your discretionary income.
Now that your federal loans have been consolidated, it’s important not to neglect your payments. If you go into default, your credit rating will suffer, and you’ll lose your access to further federal student aid – in short, you’ll reverse the positive effects of your consolidation.

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Method 3

Method 3 of 3:

Consolidating Your Private Loans

It’s important that you continue making your existing payments as you complete the consolidation process. Until you’ve been informed that your loans have been paid off and your consolidation loan has taken effect, you are legally required to make those payments.
2
Contact your preferred lender. If you’ve done your research and compared terms and interest rates from various companies, you should have a sense of which lender you would like to use. Call or email that lender to get the process started.^{[7]
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- This is a good time to ask any questions you may have about the terms and conditions associated with a consolidation loan. Keep in mind, though, that you can only trust information that’s given to you in writing – don’t assume that lenders have your best interests at heart.
3
Apply for the consolidation loan. Most companies will allow you to apply either in person or online. Either way, you’ll need to have the following information handy:
- Your current address
- Your Social Security number
- The names, addresses, and phone numbers of at least two personal references
- Proof of your monthly income
- Information about your monthly expenses
- The estimated amounts of all your loans to be consolidated. You may be asked for a “pay-off amount” for each loan. Contact your servicers to determine this amount.
- All relevant loan account numbers
- The names and addresses of your loan servicers. This information should be on your monthly statements.
4
Repeat the process if necessary. If your company of choice turns you down, you may have to try again with another company.
- If you have poor credit, or if your income suggests that you will struggle to make your payments, you may have difficulty getting a consolidation loan with relatively favorable terms. If you are sure that consolidation is the best route for you, you may, unfortunately, have to apply for a loan with a company that offers you less favorable terms, including a higher interest rate.
Once your application for a consolidation loan is accepted, read all the terms and conditions carefully before signing. It’s crucial to understand how much you’ll pay each month, how much you’ll pay over time, and what the other conditions associated with your loan might be.^{[8]
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Don’t neglect your payments once your private loans have been consolidated. Delinquencies will have a negative impact on your credit, and you’ll probably have to pay additional fees as well.

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Question

What if the school I attended is no longer in service after I graduated, 20 plus years ago? Why should I have to pay back a loan on a fly by night school?

Brian Salazar-Prince

Top Answerer

In instances like this, the law is very specific. If the school closed before you were able to complete your program with continuous enrollment, you would be permitted to either transfer the credits earned from that school to another (and keep your loans) or forfeit your earned credits and be released from your loan debt.

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I live abroad and want to consolidate all of my student loans. Will the process be the same as if I was living stateside?

Brian Salazar-Prince

Top Answerer

Because your loans originated while you lived in the U.S., as long as you maintain U.S. citizenship, the process for consolidating your loans would be essentially the same. You can contact your loan provider for more details.

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Question

Would it be wise to consolidate some, if not all, of my loans if I will be living on my own soon?

Brian Salazar-Prince

Top Answerer

Loan consolidation can be a good choice in many circumstances - it means making one payment instead of multiple payments per month. While it can increase the duration of payments, it can result in significantly fewer and significantly lower payments. If you are moving out on your own, I would likely suggest that you apply to consolidate and then, once your consolidation is approved, you immediately apply for either forbearance or deferral to give you time to get on your feet before having to make payments toward your loans. When you consolidate, you will also be able to choose a payment plan. An income-based or income-contingent payment plan is usually the best.

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Tips

Interest paid on student loans may be deductible at tax time. Check with your tax professional.

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Many companies will reduce their interest rate by a small amount if you sign up for automatic payments from your checking account.

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Warnings

Make sure you continue paying your old loans until you have received confirmation from the loan consolidation company that the loans have been paid in full. If you miss a payment, it could adversely affect your credit.

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