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The Difference Between Federal and Private Student Loan Consolidation


The majority of medical professionals leave medical school with a mountain of student loans, compiled from financing both undergrad and medical school. If you’re like most, you’ve got many loans with different monthly payment amounts, terms, loan servicers, and monthly loan statements. Trying to track and manage all these loans is often a full-time job in itself.

If you’re going out of your mind trying to manage all your loans, stay calm. You have multiple options to help streamline your payments and reduce the headache of dealing with multiple loans and loan services. One of the best ways to help simplify the mess of loans is through loan consolidation.

Student loan consolidation refers to combining all of your student loans into one loan. For example, if you have 3 loans that total $150,000, you can combine this into one $150,000, with one loan servicer, one interest rate and one monthly payment. Similar to refinancing, consolidating your loans replaces multiple loans with one big loan. This helps simplify your financial situation and makes it much easier to keep track of terms, payments and other loan information. Additionally, there is the opportunity to obtain a better interest rate through consolidation and the ability to lower your monthly payment by extending the term of the new loan.

Federal and private student loan consolidation are not the same

Examine your situation closely before choosing to consolidate your student loans. Consolidation won’t always result in a better interest rate and lowering your monthly payments typically means extending the term of the loan. It’s also important to understand that the process to consolidate federal loans is a completely different animal than consolidating private loans.

Private lenders can consolidate other private and federal loans, but you cannot combine private loans with other federal loans into a new federal direct consolidation loan.

Additionally, just because you can leverage a private consolidation option for both your private and federal loans doesn’t mean it’s a wise idea. Once you choose to use private student loan consolidation you eliminate yourself from any benefits or eligibility for repayment plans or loan forgiveness that are given through the federal programs.

If you determine that you need an income-driven repayment program or want to pursue one of the forgiveness plans, it’s best to separate your private and federal loans when consolidating.

Federal student loan consolidation

If you choose to consolidate your federal loans, the Department of Education will combine all your federal student loans into a single new loan, called a direct consolidation loan.

The majority of federal student loans are eligible for consolidation, including subsidized and unsubsidized direct loans, subsidized and unsubsidized federal Stafford loans, direct PLUS loans, supplemental loans for students (SLS), federal Perkins loans, federal nursing loans, and health education assistance loans. A complete list of the federal loans eligible for consolidation can be found here.

Access to federal repayment plans is one of the greatest benefits of direct consolidation loans for many borrowers. With a new consolidation loan, borrowers can become eligible for income-based repayment plans and forgiveness programs that you weren’t able to leverage before consolidating.

It’s important to note that federal consolidation won’t result in a lower interest rate. The new rate of your consolidation loan is calculated using a weighted average of all the interest rates on your prior student loans.

If simplifying your payment situation is your main goal and you don’t plan on leveraging the federal repayment plans available, consider a different option. Direct consolidation loans can result in paying more interest over time despite having lower monthly payments. This results as the term of the loan becomes longer. Additionally, you lost the ability to prioritize paying down high interest rate loans first to reduce the overall interest paid.

Private student loan consolidation

If you are interested in consolidating through a private student loan lender, your eligibility will vary from lender to lender. Private lenders will use different criteria to determine your creditworthiness and each lender will offer different features in their loans. Some may require a cosigner and others may require a minimum loan amount to qualify. The main point is, do your research. Compare lenders to see which fits best with your repayment goals and current financial situation.

The pros and cons of consolidating your private student loans are very similar to consolidating federal loans. You may benefit by creating a more simple financial situation, or securing lower payments, or better all around loan terms.

The biggest benefit of private student loan consolidation is the opportunity to refinance at a much lower interest rate than your current loans. This is because with private lenders, your rate is based on your creditworthiness instead of a weighted average rate of your existing student loans.

If you have a solid credit score, income and employment history, you are more likely to obtain a low rate which could make private consolidation more attractive than your federal options. Always remember, if you extend the repayment term, you are most likely paying more interest over the life of your loan despite lowering your monthly payments. If you are balancing paying down your loans with contributing money to retirement accounts, that’s not necessarily a bad thing.

In closing, it’s important to research all your options before choosing a path to consolidation.