This Is the Only Time You Should Consolidate Federal and Private Student Loans

The word consolidate in the student loan world means to combine multiple federal loans into one new federal Direct Consolidation loan. You cannot include a private loan in a federal consolidation. You can, however, combine a federal and private student loan with a student loan refinancing.

We’ll cover the three scenarios in which you would either consolidate only federal loans or only private loans, as well as the only time you should consolidate private with federal loans.

Case 1: Consolidate (refinance) federal student loans only

If you consolidate your federal loans on Studentloans.gov to a Direct Consolidation loan, you can move all your loans to one servicer and make a single monthly payment.

That said, you should not consolidate your federal loans this way unless you have no credit toward loan forgiveness. When you consolidate on Studentloans.gov, you reset the clock on 10- to 25-year loan forgiveness plans.

If, by consolidate, you actually mean refinance only your federal loans, the answer is straightforward.

If you need to pay off your loans in full and have an interest rate above 4%, you should certainly check to see if you can cut the rate on your federal loans by moving them to a private lender.

Sometimes private loans have interest rates that are unusually low. In that case, you would not want to refinance that loan if the new rate is higher than what you already have.

Because federal student loans are typically in the 5% to 8% interest range, if you know you need to pay your debt off, refinancing only federal loans can make sense if you have low-cost private debt already.

Case 2: Consolidate only your private loans

If you expect to have your federal loans forgiven under a 10-year Public Service Loan Forgiveness plan or 20-year Income-Driven Repayment plan, do not refinance and combine your federal loans with your private loans.

Doing so would eliminate forgiveness options and prevent you from being able to pay based on your income. You could pay tens or hundreds of thousands of dollars more than you need to by throwing away these benefits.

That cost could easily be more than any interest savings you might have generated. After all, lowering your interest rate by 2% on a $200,000 loan only saves $4,000 in the first year. Using a tax-free forgiveness plan, however, might save you six figures on your federal loan debt.

In that case, if you have private loans, you should attempt to consolidate them into a refinanced loan if you can find a lower interest rate.

That’s the only test for private loan consolidation: Can you find a lower interest rate somewhere? If so, then sign on the dotted line.

Where can you consolidate private student loans?

You can apply to lower your private loan interest rate at any student loan refinancing company. Some of them will even allow you to consolidate loans from for-profit schools and programs where you didn’t graduate.

So, there’s no reason not to cast a wide net and apply for the full amount of your private loan principal and interest to see if you could lower your interest rate or your payment or both.

Case 3: Consolidate your federal and private loans together

The only time you should consolidate both your federal and private loans together is when you need to refinance your debt because you plan to pay it off in full.

Otherwise, you’d give up valuable protections like forgiveness on the federal debt.

To make this decision of whether or not to refinance your federal and private loans together, you should look at the following two questions:

• Is the ratio of your federal student debt divided by your income below 1.5?
• Is your private student loan interest rate above 4%?

If you can answer both of these questions in the affirmative, then you’re a good candidate for combining your federal and private student loans into one big loan.

What do you lose by consolidating your federal and private loans into one loan?

When you consolidate your private and federal loans together, you lose both of these repayment options:

• Debt snowball: This is a debt payoff method in which you pay your smallest loan first, then the next smallest, and you continue until all your debt is gone. This method can be very psychologically fulfilling and motivate you to pay your debt off faster.
• Debt avalanche: This plan is when you pay off whichever of your loans has the highest interest rate first, regardless of the loan amount, and then the loan with the next largest interest rate, and so on.

Both of these debt repayment strategies make sense if you don’t change the average interest rate of your loans.

If you lower your interest rate by consolidating through a refinance, however, then the advantage of the lower interest cost beats the debt snowball and avalanche methods because it saves you more money.

What do you gain when you combine all federal and private student loans?

If you combine all your student loans together, here are three positive benefits you’ll get:

1. One payment
2. One servicer
3. One login

If you refinance the loan, you hopefully also get a fourth feature, which is lower overall interest costs.

If you have questions about combining federal and private student loans, sound off in the comments below!