Many people graduate from college with multiple student loans, and they must suddenly start payments. Not only do these loans create an additional financial burden, but making payments on multiple different loans can also complicate your financial situation, making it difficult to keep track of all your payments. 

That’s where student loan consolidation comes in. Loan consolidation is the process of combining multiple separate loans into one new loan. It helps simplify your finances while offering other potential benefits, such as reduced interest and lower monthly payments. 

If you have multiple student loans and are looking for a solution to help simplify your finances, keep reading to learn more about how student loan consolidation works, how it differs from refinancing, what types of loans it's best for, and more. 

Read more: Student loan repayment: Tips and strategies 

Consolidation vs. refinancing: Key differences 

Loan consolidation and refinancing are two of the most popular methods for managing student loan payments. Although consolidation and refinancing are different, they can offer similar benefits and, in some cases, are done together. 

Student loan refinancing 

Student loan refinancing is the process of replacing one student loan with a different one. The new loan is used to pay off your original student loan and has a new repayment term, interest rate, monthly payment, and more. 

For example, suppose you have a private student loan with a balance of $10,000, a repayment term of five years, an interest rate of 9%, and a monthly payment of $207.58. You’re eligible for a refinance loan with an interest rate of 6%. Your new loan will have a monthly payment of $193.33. Thanks to your lower interest rate, you’ll save $14.25 in interest per month and a total of $855.33 over your entire five-year loan term. 

Read more: What is an interest rate? 

Student loan refinancing can offer several key benefits, including: 

• Lower interest rate: Depending on your credit score, you may qualify for a lower interest rate and save hundreds or thousands of dollars in the long run. 

• Lower monthly payment: Depending on your new interest rate and repayment term, you may be able to get a loan with a lower monthly payment. 

• New payment term: When you refinance your loan, you’ll have a new repayment term, which could allow you to either shorten your loan term to pay it off faster or extend your loan term to lower your monthly payment. 

Student loan consolidation 

Student loan consolidation is the process of combining multiple separate loans into one new loan. Loan consolidation is also a form of refinancing, except you’re refinancing multiple loans at once with one new consolidation loan. 

For example, suppose you have three different student loans. Each loan has a 10-year repayment term and its own balance, interest rate, and monthly payment. If you consolidated the loans, you would take out one refinance loan that’s large enough to pay off all three loans. 

Once you’ve consolidated your loans, you will have just one loan with a larger balance and a new interest rate. Additionally, instead of making three monthly payments each month, you would make just one. 

The table below shows the three different loans and their corresponding balances, interest rates, and repayment terms. 

	Loan A	Loan B	Loan C	Consolidated Loan
Balance	$10,000	$8,000	$12,000	$30,000
Interest Rate	6%	10%	8%	7%
Monthly Payment	$111.02	$105.72	$145.59	$348.33
Combined Monthly Payment	$362.23			$348.33
Total Interest Payments	$13,480.10			$11,799.05

Based on those figures, your combined monthly student loan payments equal $362.33. If your new loan combines the balances of your three separate loans at a 7% interest rate and maintains your payment term of 10%, your new monthly payment would be $348.33. You would ultimately save more than $1,600 in interest over the 10-year term. 

Private student loan consolidation 

When you consolidate private student loans, you take out a private consolidation loan to replace existing private student loans. It’s a popular option among borrowers to help reduce the number of monthly payments. But even more important, it can help lower borrowers’ interest rates and save them hundreds or thousands of dollars over the term of their loan. 

Private student loan consolidation requires a credit check, and your loan eligibility and credit score are based on your credit score. The better your credit score, the better your chances of qualifying for a loan and the lower your interest rate. Other eligibility requirements include having a steady income and a sufficient debt-to-income ratio (DTI) to make your monthly payments. 

It’s still possible to consolidate private student loans if you have less-than-ideal credit. However, you may be stuck with a high interest rate. Alternatively, you could apply with a cosigner, which could improve your chances of approval and lower your interest rate.  

If you’re considering consolidating your student loans and aren’t sure if it’s the right choice, consider using an online loan consolidation calculator. You’ll enter the terms of your existing loans and the rate quote you’ve received for a new loan to get an idea of whether you’ll save money by consolidating your loans. 

How to consolidate private student loans: Step-by-step guide 

Are you considering your private student loans? Here’s a step-by-step guide to help you get started: 

1. Research suitable lenders: There are many lenders on the market that offer student loan consolidation. Narrow down your list to those lenders that offer the loan amount and repayment term you need and that have competitive interest rates. 

2. Get multiple rate offers: Most lenders allow you to prequalify to see what interest rate you’re eligible for. Depending on the lender, this may or may not impact your credit score. Using this information, you can choose the lender that offers the lowest annual percentage rate (APR), which is the combination of interest and fees. 

3. Choose the right loan term: Once you’ve chosen a lender, you can identify the best loan term. A longer loan term allows for a lower monthly payment, but also typically requires a higher interest rate and higher long-term interest paid. A short loan term, though it requires a higher payment, allows you to pay less interest. 

4. Complete the application process: To finalize your loan, you’ll have to submit a formal application and provide information about your finances so the lender can determine whether you’re eligible. Once you’ve been approved, you’ll have to sign your loan documents and then will have your student loans consolidated. 

Federal student loan consolidation 

If you have multiple federal student loans, you can combine them into one Direct Consolidation Loan, which is also a federal loan. 

There are several key benefits to a federal consolidation loan. First, you’ll combine multiple loans and monthly payments into just one. You may also have access to new repayment plans, which can help lower your monthly payment. 

Getting a federal consolidation loan works differently than getting a private one. Anyone with eligible loans can consolidate them. There’s also no application fee or loan fees. Federal loan consolidation also doesn’t require a credit check like private loan consolidation does. 

Unfortunately, you won’t be able to get a lower interest rate on your loans. Instead, the interest rate on your new loan is the weighted average of the rates on the loans you’re consolidating rounded up to the nearest one-eighth of a percent. 

To apply for a federal consolidation loan, all you have to do is log into your student loan account at StudentAid.gov and complete the consolidation application. It will take less than 30 minutes. 

Can you consolidate federal loans with a private loan? 

It’s technically possible to consolidate federal student loans with a private loan, but it’s not necessarily advisable. Federal loans have all sorts of benefits and protections, and if you refinance to a private loan, you lose access to those benefits. Some benefits of federal loans that private loans may not offer include: 

• Competitive fixed interest rates 

• Income-driven repayment plans 

• Deferment and forbearance 

• Student loan forgiveness 

Read more: What to know about student loan debt (and tips for making payments) 

Some borrowers may decide that consolidating their private loans is still the right choice if they qualify for considerable interest savings, but it’s important to run the numbers and understand the potential benefits you’re giving up.