Student Loan Consolidation

student loan consolidation

Consolidation Loans combine several student or parent loans into one bigger loan from a single lender, which is then used to pay off the balances on the other loans. They also provide an opportunity for alternative repayment plans, making monthly payments more manageable.

Consolidation loans are available for most federal loans, including Stafford, PLUS and SLS, FISL, Perkins, Health Professional Student Loans, NSL, HEAL, Guaranteed Student Loans and Direct loans. Some lenders offer private consolidation loans for private education loans as well. Some lenders, like Credible. offer private consolidation loans.

Federal student loan consolidation

In the United States, the Federal Direct Student Loan Program (FDLP) includes consolidation loans that allow students to consolidate Stafford Loans, PLUS Loans, and Federal Perkins Loans into one single debt. This results in reduced monthly repayments and a longer term for the loan. Unlike the other loans, consolidation loans have a fixed interest rate for the life of the loan.

Interest rates and payments

Consolidation loans have longer terms than other loans. Debtors can choose terms of 10–30 years. Although the monthly repayments are lower, the total amount paid over the term of the loan is higher than would be paid with other loans. The fixed interest rate is calculated as the weighted average of the interest rates of the loans being consolidated, assigning relative weights according to the amounts borrowed, rounded up to the nearest 0.125%, and capped at 8.25%. Some features of the original consolidated loans, such as postgraduation grace periods and special forgiveness circumstances, are not carried over into the consolidation loan, and consolidation loans are not universally suitable for all debtors.


The Federal Loan Consolidation Program was created in 1986. In 1998, the United States Congress changed the interest rate to the aforementioned fixed rate weighted mean, effective February 1, 1999. Consolidation loans taken out before that date had a variable interest rate, determined by the individual FDLP loan origination center (e.g., in the case of a university, that university) or FFELP lender (e.g., a third party bank).

In 2005, the Government Accountability Office considered consolidating consolidation loans so that they were exclusively managed through the FDLP. Based on several assumptions about future variations in interest rates, the loan volume, the percentage of defaulters, cost estimates from the United States Department of Education, it concluded that while doing so would incur an additional cost of $46 million, caused by the higher administrative costs of the FDLP compared to the FFELP, this would be offset by a $3,100 million saving comprised in part of avoiding $2,500 million in subsidy costs. In 2008, turmoil in the financial and credit markets has led to the suspension of many loan consolidation programs, including Sallie Mae, Nelnet and Next Student.

Private student loan (United States)

A private student loan is a financing option for higher education in the United States that can supplement, but should not replace, federal loans, such as Stafford loans, Perkins loans and PLUS loans. Private loans, which are heavily advertised, do not have the forbearance and deferral options available with federal loans (which are never advertised). In contrast with federal subsidized loans, interest accrues while the student is in college, although repayment may not begin until after graduation. While unsubsidized federal loans do have interest charges while the student is studying, private student loan rates are often higher, sometimes much higher. Fees vary greatly, and legal cases have reported collection charges reaching 50% of amount of the loan. Since 2011, most private student loans are offered with zero fees, effectively rolling the fees into the interest rates.

Interest rates and loan terms are set by the financial institution that underwrites the loan, typically based on the perceived risk that the borrower may be delinquent or in default of payments of the loan. Most lenders assign interest rates based on 4-6 tiers of credit scores.[further explanation needed] The underwriting decision is complicated by the fact that students often do not have a credit history that would indicate creditworthiness. As a result, interest rates may vary considerably across lenders, and some loans have variable interest rates. More than 90% of private student loans to undergraduate students and more than 75% of private student loans to graduate students require a creditworthy cosigner.[1]

Unlike other consumer loans, Congress made student loans, both federal and private, exempt from discharge (cancellation) in the event of a personal bankruptcy, except when repaying the student loan would represent an undue hardship on the borrower and the borrower’s dependents. This is a serious restriction that students rarely appreciate when obtaining a student loan.

Financial aid, including loans, may not exceed the cost of attendance.

Parallels to mortgage lending

The increase in use of private student loans came about around 2001 once the increase in the cost of education began to exceed the increase in the amount of federal student aid available.

The recent history of student loans has been compared to the history of the mortgage industry. Similar to the way in which mortgages were securitized and sold off by lenders to investors, student loans were also sold off to investors, thereby eliminating the risk of loss for the actual lender.

Another parallel between the student loan industry and the mortgage industry is the fact that subprime lending has run rampant over the past few years.[citation needed] Just as little documentation was needed to take out a subprime mortgage loan, even less was needed to take out a subprime or “non-traditional” student loan.

No Cost to Consolidate

Aside from a slight increase in the interest rate on the consolidation loan, there is no cost to consolidate your loans. There are no fees to consolidate.

Under no circumstances should you pay a fee in advance to get a federal education loan or consolidate your federal education loans. There are no fees to consolidate your loans. While other federal education loans, such as the Stafford and PLUS loans, may charge some fees, the fees are always deducted from the disbursement check. There is never an upfront fee. If someone wants you to pay an upfront fee, chances are that it is an example of an advance fee loan scam.

Who Can Consolidate

Both student and parent borrowers can consolidate their education loans. Students and parents cannot combine their loans through consolidation, since only loans from the same borrower can be consolidated. But they can consolidate their loans separately.

Students can consolidate their education loans only during the grace period or after the loans enter repayment. Loans that are in default but with satisfactory repayment arrangements may also be consolidated. Students can no longer consolidate while they are still in school. Parents, however, can consolidate PLUS loans at any time.

Which Loans Can be Consolidated?

Any federal education loan can be consolidated. You can even consolidate a single loan. There are, however, a few restrictions on consolidating a consolidation loan.

You can consolidate a consolidation loan only once. In order to reconsolidate an existing consolidation loan, you must add loans that were not previously consolidated to the consolidation loan. You can also consolidate two consolidation loans together. But you cannot consolidate a single consolidation loan by itself.

Note that when you reconsolidate a consolidation loan, it does not relock the rates on the consolidation loan. The consolidation loan is treated as a fixed rate loan within the weighted average interest rate formula used to calculate the interest rate on the new consolidation loan.

Repayment Plans

Consolidation loans provide access to several alternate repayment plans besides standard ten-year repayment. These include extended repayment, graduated repayment, income contingent repayment (Direct Loans only) and income sensitive repayment (FFEL only). If you do not specify the repayment terms, you will receive standard ten-year repayment.

Consolidation loans often reduce the size of the monthly payment by extending the term of the loan beyond the 10-year repayment plan that is standard with federal loans. Depending on the loan amount, the term of the loan can be extended from 12 to 30 years. The reduced monthly payment may make the loan easier to repay for some borrowers. However, by extending the term of a loan the total amount of interest paid over the lifetime of the loan is increased.

You do not need to pick an alternate repayment plan. We recommend sticking with standard ten-year repayment, because it will save you money. The alternate repayment plans may have lower monthly payments, but this increases the term of the loan and the total interest paid over the lifetime of the loan.

Repayment on a consolidation loan will begin within 60 days of disbursement of the loan, unless the borrower qualifies for a deferment or forbearance.

Student Loan Consolidation & Refinancing Lenders


Today, there are a number of new private consolidation companies looking to help borrowers improve their financial health. SoFi, aka Social Finance, has quickly positioned itself as one of the best student loan refinance lenders on the market.

SoFi was founded by a group of Stanford business students who wanted to help their peers escape from student debt with lower interest rates. The program launched at Stanford in 2011 and has quickly grown. Today, SoFi now helps student debt borrowers to refinance student loans nationwide.

If you have strong credit and a higher income, SoFi might be the right fit for you. Here’s a rundown of what’s offered;

  • Refinance & consolidate both federal & private student loans
  • Must have completed an eligible undergraduate or graduate degree program
  • ​Undergraduate & graduate student loans are both eligible
  • 5, 7, 10, 15, and 20 year repayment terms
  • 2.54% APR to 7.38% APR (with AutoPay) variable rates, capped at 8.95% to 9.95% APR
  • 3.25% APR to 7.13% APR (with AutoPay) fixed rates
  • AutoPay discount
  • Strong credit score, salary, and debt-to-income requirements
  • Zero prepayment penalties
  • Zero origination fees
  • Unemployment protection – payments are temporarily suspended
  • Career support for SoFi members
  • Entrepreneur program


Earnest ranks as one of the best student loan refinance and consolidation lenders. Since the company’s founding in 2013, it has expanded to over 160 employees. Located in San Francisco, Earnest offers personal loans and student loan refinancing.

Earnest stands out from most of the other companies mentioned on this page by using different types of data to determine eligibility and plans for applicants who wish to refinance student loans. This data helps determine how likely individuals are to pay back their debt and the best options for all parties involved. If you have student loans, consider giving Earnest a look.

​Earnest’s student loan refinance and consolidation program is perfect for people who want:

  • To save money with a lower interest rate
  • A flexible repayment plan
  • ​A servicer that treats each customer as an individual
  • Eligibility to be based off more than credit score

LendEDU gives Earnest our stamp of approval. Read on to see if you might be eligible:

  • ​​Refinance and consolidate both federal and private student debt
  • Have completed school or are in the final semester of degree
  • Have at least $5,000 in student debt
  • Variable rates as low as 2.57% APR with AutoPay
  • Fixed rates as low as 3.25% APR with AutoPay
  • Data-driven eligibility requirements
  • No application, origination, or prepayment fees
  • Unique deferment options including job loss protection
  • Options to switch between variable and fixed interest rates
  • Bi-weekly payments


Another great choice for borrowers is LendKey. This unique company brings local credit unions to the table to help borrowers refinance their student loans. The result is great customer service and interest rate options for those looking to save.​

The LendKey refinancing and debt consolidation program could be a good fit for people who want:

  • Cosigner release after 12 months of on-time payments
  • Low interest rates
  • A personal approach to borrowing
  • Great customer service
  • A credit union experience

​More details;

  • Must have completed an eligible undergraduate or graduate degree program
  • Undergraduate and graduate student loans are eligible
  • Consolidate student loans together (both federal & private)
  • Variable rates as low as 3.15% APR (with AutoPay)
  • Fixed rates as low as 2.58% APR (with AutoPay)
  • Interest-only repayment option
  • 5, 7, 10, 15, and 20 year repayment terms
  • No origination fees or prepayment penalties
  • Medium credit score, salary, and debt-to-income requirements
  • Not-for-profit lenders
  • Excellent customer service
  • Cosigner release available if the primary borrower is eligible even without a cosigner

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