Student Loan Consolidation: When Should You Consider It?

Maybe even more so than other forms of debt, student loans can feel like a shackle around your neck. They linger for years, often with such high balances that it becomes a simple test of endurance to pay them off. Anything you can do to lessen the load and pay them off sooner starts to feel like it’s worth looking into. So does that mean you should give student loan consolidation a try?

Maybe. There are some benefits to combining your student loans. Although it’s not going to do much to save you money and might actually end up keeping you in debt for longer… There’s a lot to consider. Let’s take a look.

Student loan consolidation: What to consider

Debt consolidation always entails taking out a new loan, using the funds to pay off multiple older credit accounts, and then repaying the new loan over a fixed term.

Ideally, the new loan will offer some monetary benefit other than reducing the number of payments you have to keep track of (like a lower interest rate), but this isn’t necessary for it to qualify as a consolidation.

Student loan consolidations function the same way, but there are some additional rules because of the different types of student loans, of which there are two:

  • Federal: Owned directly by the government; usually offer lower rates and access to a variety of benefits and subsidies.
  • Private: Owned by private organizations like banks, credit unions, or the schools themselves; rates depend on your credit score and you have no access to government benefits.

As you might expect, most borrowers prefer to take out federal student loans over private ones due to the extra privileges.

It’s important to note that because of these privileges, you can’t use a federal loan to consolidate private loans. Federal student loan consolidation is a sponsored government program, not just a financial transaction.

You can (usually) only take advantage of it once. Now, let’s take a look at why you would or wouldn’t want to.

Why would you want to consolidate student loans?

Student loan consolidation can grant you two benefits:

  • Fewer monthly payments
  • Smaller total monthly outlay

Remember, consolidation allows you to reduce your total number of loans (and corresponding payments) to one while simultaneously resetting your repayment term.

The outstanding balance won’t decrease, but you’ll be amortizing the amount for longer and therefore need to pay less each month to reach the same total principal repayment.

Alicia Plemmons, Assistant Professor of Finance and Economics shares insights on student loan refinancing

What advice do you have for borrowers who are considering refinancing given the possibility of student loan forgiveness?  

I would suggest before refinancing with a private lender, to consider what may happen with loan forgiveness. For example, in the recent pandemic, private student loans were unable to take advantage of interest and payment freezes or other federal protections. These private student loans would not be discharged in the event of loan forgiveness actions by the Biden Administration. One alternative to consider is a partial refinance, where only some of the student loans are refinanced and the rest continue to be held by the federal lending services. A partial refinance can help lower overall interest rates and payments while still allowing some loans to potentially be forgiven.

What advice would you give to an inspiring student who is considering taking out student loans?  

Spend time considering your repayment strategy. Will this degree increase your future wages by more than the loan payments? How much are the monthly loan payments? Are you willing to give up that amount of money every month for 10 to 20 years? Understanding the financial impact of loan repayment in the future will help students understand the implications of these loans, so that it is not a surprise after graduation. Students should think critically about the interest rates on loans, types of repayment, and deferral programs if the student does not immediately gain employment. Loans differ in things such as if interest will accrue while they are not making payments, so comparing loan features outside of the dollar amount can help contextualize the repayment terms. Being a student is exciting, and an awesome new adventure. Doing the leg work while applying for loans to understand the future payment process and options can help aspiring students keep their loans from holding them back in life after school.

Which of Joe Biden’s six student loan forgiveness proposals do you agree with the most to help alleviate the student debt crisis, and why?  

Out of the six, I believe that restoring bankruptcy discharge of student loans is one of the most important policies for targeting the student debt crisis. Student loans and credit cards are often two of the largest sources of debt an individual has, and both are not fully discharged unless under a case where repayment would cause extreme undue harm. The individual may be unable to obtain employment in that field, may be unable to work, or many other situations where repayment is impractical. If we allow individuals going through bankruptcy to discharge their student loan debt, this lowers a massive barrier to restarting their financial path. In our current student debt crisis, individuals paying on loans often forego entering new industries, working for non-profits, or starting their own business ventures because of these heavy financial burdens. Allowing for discharge can help promote the “fresh start” that bankruptcy is designed to build.

Beyond these fundamental benefits, there are some additional advantages specific to the type of student loans you consolidate.

When you consolidate federal student loans, you typically don’t need to pay anything. That’s a big deal since private consolidation fees are usually a percentage of the balance, which can get pretty expensive.

And if you’re consolidating private loans, you may have the opportunity to reduce your interest rate in some cases (more on that in a bit), while federal student loan consolidation loans are always a weighted average of your previous loans’ rates.

Why would you NOT want a student loan consolidation?

As we mentioned above, student loan consolidations usually lower your monthly payment by extending your repayment term. That might make your life easier in the short-term, but it’s not the most strategic decision.

If you were hoping to speed up your journey to debt-freedom, debt consolidation is unlikely to help you speed up the process in any meaningful way.

And because you’re extending the life of the loan, you’re also giving interest more time to accrue, which may cause you to end up paying more (sometimes significantly more).

Additionally, if you have a mix of federal and private loans, you’ll run into problems trying to consolidate them all into one.

You can’t consolidate private loans into a federal loan, and consolidating federal loans into a private loan will cost you all of your federal benefits.

But the more problematic issues are again specific to the type of loan:

  • Federal student loan consolidations do nothing to lower your interest rate. You can simplify your payments, but it won’t do anything to save you money. If that was your only motive for the transaction, it’s a waste of time. Federal consolidation might even end up costing you more, in the end.
  • Private student loan consolidations can lower your interest rate, but they’re usually still more expensive than federal loans, especially since working with a private lender usually means you’ll have to pay a fee to initiate the consolidation.

The fact that private consolidations can lower your interest rate is what usually causes people to mix them up with refinances. While the two can overlap somewhat, they are different, and the distinction is significant.

What’s the difference between consolidating and refinancing?

The essence of loan consolidation is the combination of multiple loans into a single credit account. The essence of refinancing has nothing to do with the number of loans, only to do with an improvement of your loan terms.

A federal loan consolidation is a pure example of a consolidation transaction. Your new interest rate is the weighted average of your previous loans, so there’s no change in cost, only a reduction in the number of payments.


A private loan consolidation often includes elements of a refinance, which contributes to the confusion between the two.

When you consolidate your old loans with a new private loan, you can significantly change the terms and get an improved interest rate if your credit score has increased or overall bank rates have gone down.

For example, mortgages are commonly refinanced, which doesn’t decrease the number of loans you hold. But because mortgage terms often span multiple decades, there’s plenty of time for a decrease in interest rates or an increase in a borrower’s credit score. 

What types of student loans can be consolidated or refinanced?

All of these limits mean that your options are for consolidations and refinances are surprisingly limited.

The federal student loan consolidation program won’t allow you to include private loans in their transaction at all. And if you want to keep the governmental privileges that come with federal student loans, you can’t consolidate your federal loans into a private loan either.

But it doesn’t stop there. Federal loans can’t be refinanced at all. The federal rate is set by the government and has nothing to do with your credit score, so you can’t improve your credit and then hope to get a better deal.

Essentially, your only options are:

  • Consolidate your federal loans into a single federal loan
  • Consolidate your private loans into a single private loan
  • Refinance your private loan(s) into another private loan

All of the other combinations are either unhelpful or simply not allowed.

When you should choose to refinance

Because student loan refinancing is only accessible through a private lender, its usefulness is limited.

SMU Professor Daniel Howard, PHD Shares Advice on Student Loan Refinancing and Forgiveness


It is not a bad strategy but understand you are playing a chess game here.  I believe there is a strong possibility of some level of student loan forgiveness.  However, the level of forgiveness, when it will occur, and with what contingencies is an open question.  



Do not take out a student loan unless it is necessary.  Taking out a student loan today seems to have become a knee jerk reaction, resulting in major problems for many students in paying back those loans.  Never borrow money unless life forces the issue.  If you honestly cannot attend college without a student loan, that is a good reason to apply for one.  But remember, the last thing many college graduates want is a loan to pay back when trying to establish themselves in life, which often involves purchasing many things, including cars and furniture, not to mention paying rent.  


I do not agree with any of them.  I believe that when someone borrows money they should pay it back.  Forgiving someone’s debt sets a bad example for future students considering borrowing money, as well for the population as a whole.  On the other hand, I understand how and why many student loans end in default.  The job market is tough and not all jobs pay the same.  For that reason, I would support Biden’s proposal to forgive $10,000 in student loans.   

Daniel J. Howard received his PhD in business administration from Ohio State University, where he specialized in marketing and consumer behavior.  He has published extensively in the area of influence and persuasion.  He currently serves as associate editor of Social Influence and has been an editorial board member for the Journal of Advertising for over 20 years.

The government holds the vast majority of student loans, so most of the time a refinance would mean that you’d be giving up a lot of privileges for a slim chance at reducing your interest rate.

That said, refinancing does make sense when you hold one or more expensive private loans and meet one of the following conditions:

  • Your credit score has increased significantly
  • Lending rates have decreased significantly

In either of these cases, you won’t have anything to lose by working with a private lender, but you’ll likely be able to qualify for a better interest rate than you held previously.

Beware student loan consolidation and refinancing scams

As is the case in many other lending industries, scams have developed around student debt management.

If you’re considering student loan consolidation or refinancing, make sure that you’re dealing with the proper and legitimate parties and not a scam artist.

For federal loans, you should never deal with anyone other than a representative from the Department of Education.

Things become a bit less black-and-white when you’re using private loans since these are provided by a wider range of groups and individuals, but here are some good guidelines to recognize and avoid scams:

  • Don’t trust a party that contacts you first by email or phone, especially if you don’t recognize them
  • Be wary of any upfront fee necessary to qualify for any sort of student loan assistance. 
  • Don’t trust anyone who promises you a rapid “loan forgiveness.” Forgiveness is a rare occurrence that generally only happens after years of payments and some extenuating circumstances.

When in doubt, err on the side of caution. Keep your personal information a secret whenever possible and carefully vet everyone you work with. Even if someone seems legitimate, a quick Google search and online background check can go a long way.

Should I consolidate my student loans?

Everyone’s priorities and student loan situations are different, so there is no universally correct choice when it comes to consolidating student loans.

But in general, it’s probably a good idea when:

  • You’re having trouble managing all of your debt payments
  • The consolidation won’t cost you anything (in fees, a higher interest, or lost governmental privileges)

If you fall into that category, then go for it. Otherwise, student loan consolidation might not be worth it. Consider refinancing or some other form of debt management.