How to Consolidate Student Loans

By Tom Anderson, CommonBond content manager

Consolidating your student loans can be confusing, but it doesn't have to be.

Even the word "consolidation" when it applies to student loans is a source of confusion. When you consolidate your federal student loans, you combine many federal student loans into a new federal loan.

But when you "consolidate" private student loans or both federal and private student loans, you are actually refinancing them. Refinancing means taking out a new loan to pay off existing loans. That may sound like the same thing as consolidation, but let's walk through the federal loan consolidation process to illustrate how consolidation differs from refinancing.

Consolidating Federal Student Loans Through the Federal Government

You can consolidate your federal student loans through a Direct Consolidation Loan from the federal government. A Direct Consolidation Loan lets you combine all your federal student loans into one federal loan. Most federal student loans are eligible for consolidation, but you can't use a Direct Consolidation Loan to consolidate student loans from private lenders.

A Direct Consolidation Loan has a fixed interest rate for the life of the loan. The fixed rate is based on the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth of 1 percent. That means when you consolidate your federal student loans, you aren't getting a lower interest rate, just an average of the rates on your existing loans.

The repayment term of a Direct Consolidation Loan ranges from 10 to 30 years, depending on the amount of your consolidation loan, other educational loan debt you may have and the repayment plan you select. Depending on the length of the loan, you could potentially pay more interest with a Direct Consolidation Loan over time than you would by paying off your existing federal student loans, unless you pay off the consolidation loan more quickly than required.

Benefits of Consolidating Federal Student Loans

One of the key benefits to a Direct Consolidation Loan, compared to refinancing with a private lender, is that you have access to income-driven repayment plans. These plans help you lower your monthly payments by allowing you to pay a portion of your discretionary income, which is the money leftover after you cover necessities, to your student loans instead of the standard monthly payment. The percentage of discretionary income paid each month depends on the plan you choose and when you took out your federal student loans.

Under all income-driven plans, any remaining loan balance is forgiven and taxed as income if your federal student loans are not fully repaid at the end of the repayment period. That repayment period can range from 20 to 25 years depending on the plan.

Direct Consolidation Loans also offer loan forgiveness programs for teachers and those in public service.

The federal government provides an online tool to estimate your repayment options and eligibility for income-driven repayment plans.

You can apply for a Direct Consolidation Loan through or call the federal Loan Consolidation Information Call Center at 1-800-557-7392.

Drawbacks of Consolidating Federal Student Loans

A Direct Consolidation Loan makes sense if you want to use an income-driven repayment plan or participate in a loan forgiveness program. But a Direct Consolidation Loan doesn't lower the interest rate on your student loans nor can you use it to refinance private student loans.

Many private lenders, including CommonBond, offer loans that can help you refinance both your federal and private student loans. Unlike a Direct Consolidation Loan, refinancing with a private lender can actually lower your rate and monthly payment. At CommonBond, borrowers save more than $14,000, on average, over the life of their loan.1

You also can gain more financial flexibility with some private lenders. For example, at CommonBond, you can add a cosigner to lower your interest rate.

Refinancing with private lenders can come with some drawbacks. Loan approvals are based on your financial history and are not guaranteed like a Direct Consolidation Loan. Private loan refinancing also means you can't use a federal income-driven repayment plan or a loan forgiveness program. But some private lenders, including CommonBond, allow you to defer payments if you lose your job or go back to school.

Choosing between federal loan consolidation and private loan refinancing can feel overwhelming at times If you have any questions about your student loan options, please contact the CommonBond Care Team.

Tom Anderson is content manager at CommonBond, a values-driven fintech company that is reimagining the student loan experience. The company refinances student loans to provide a better experience through lower interest rates, personal customer service, a simple application process and a strong commitment to social good.

1) Savings calculation of $14,581 is based on loan amounts and terms selected by CommonBond borrowers who refinanced their student loans between 5/15/15 and 6/30/15. Savings is calculated as the difference between borrowers' estimated future payments for a sample of previously held loans and their future expected payments after refinancing with CommonBond. The calculation is a weighted average dollar savings across loan terms and assumes no change in interest rates, on-time payments, enrollment in ACH, and no pre-payment of loans.