Everything You Need to Know About Private Student Loan Consolidation

Renee Layberry
May 4, 2021

If you have more than one private student loan – a loan where your lender is a bank or student loan finance company – you may wish to consider consolidating.   Private student loan consolidation is more commonly referred to as refinancing, which is often a very confusing delineation to make. Let's examine how consolidation and refinancing differ.   Here's a quick summary of consolidating vs refinancing:
  • Federal student loan consolidation is the process of combining all your federal student loans into one easy payment. Often times this is done to take advantage of a federal loan repayment program. Federal loan consolidation never lowers your interest rate and might only lower your payment by extending your terms.
  • Student loan refinancing, or private student loan consolidation, is done through a private lender usually to obtain a lower interest rate if you qualify.
  In addition to lowering your interest rate, private student loan consolidation can make your life easier. Instead of having several different monthly payments to make, you'll have just one.   Not only does that make bill-paying easier, it means you are less likely to forget and end up with late payment penalties.   There's no real downside to consolidating your private student loans (assuming you qualify for a lower interest rate), so let's get started. Keep reading to find out answers to all your questions about private student loan consolidation.   More >> How to choose between refinancing vs consolidating your student loans  

A deeper dive into private loan consolidation?

Private student loan consolidation means you combine two or more loans into one with a new interest rate.   Your consolidated loan will also have a new monthly repayment amount, and the term of the new loan may extend over a longer or shorter period of time, depending on what you decide.   Remember that private student loans are those that are financed by banks or student loan companies. Federal loans are issued by the United States government and require a different process for consolidating.  

What's the difference between consolidating and refinancing loans?

Consolidating loans means you are combining multiple loans into one. When you do that with private student loans, you are effectively refinancing, because your existing loans are paid out in full by a new loan and now you're in charge of paying the new loan back.   Your new loan will have different terms.   You may, for instance, be eligible for a lower interest rate.   You may also choose a shorter loan term. While that may raise your monthly payments, you will pay less over the life of the loan.  

What are the benefits of consolidation?

When you consolidate your loans, you then have just a single loan payment to make every month. What's more important is that you can refinance your loans. You may qualify for a lower interest rate and set terms of repayment that work with your financial situation.   Photo by MoniQue

Am I eligible to consolidate my private student loans?

You might be a good candidate for private student loan consolidation if you meet all of the following conditions:
  • You are a U.S. citizen and at least 18 years of age.
  • Your credit score is about 650 or above.
  • Generally, your total loan balance can be no more than $150,000.
  • You have a regular income with which you can make repayments and your payment history is good.

Do I need a co-signer to consolidate?

If you have a low credit score (under 650), you may not qualify for private loan consolidation. If, however, you have a co-signer, you may be able to consolidate.   And as you build up your credit rating and repayment history, you can refinance later under your own name.   It’s important to note that even if you qualify on your own, you may want to consider a co-signer. If your parents have a higher credit score than you, a strong repayment history, and consistent income, they may qualify for a lower interest rate than you could on your own.   Keep in mind, however, that if you default on a consolidated loan, you could ruin your co-signer's credit rating.  

What's a fixed interest rate and a variable interest rate?

A fixed interest rate is one that doesn't change; it will remain the same for the life of your loan. Even if interest rates in general increase, your fixed rate will not.   Locking into an interest rate right now can be a smart decision, because interest rates are currently at record lows.   A variable rate is one that changes. It may change quarterly, meaning that your payment rates could fluctuate (higher or lower) throughout the year. Variable rates are a gamble. You might get a lower interest rate for a few months, but the rate could then balloon the next quarter.   Planning your budget is much harder when you can't depend on a consistent interest rate.   More >> Interest rates for 2020 and how they work  

What will my interest rate be if I consolidate?

Your interest rate will be determined by your credit score and by your choice of a fixed or variable rate. You'll want to check around with several banks or student loan financing companies to see who can offer the best rates.   man signing a contract for a loan Photo by Scott Graham

Where's the best place to consolidate my private school loans?

This is a tough question to answer because so much depends on your personal situation. In general, though, the best place to consolidate your private school loans is going to be the lender who can offer you the best interest rate given the terms of your loan.   This means you have to shop around to get the best rate.   Before you shop around, gather all your paperwork so you know how many private loans you have and what your total amount owing is.   You'll also want to get your credit report so that you know what your credit score is. You can request your credit report at AnnualCreditReport.com or by calling 1-877-322-8228.   Once you have your loan information and credit report, most lenders will be able to tell you whether or not you'll qualify for a new loan on your own, or if you need a co-signer.   They should also be able to ballpark an interest rate based on your situation.  

Do I have to consolidate all of my private school loans?

You can choose the loans you want to consolidate. In some cases, you may have a loan with a really good fixed interest rate and want to keep that one as is. You can consolidate just those with higher interest rates.   In order to decide which loans to consolidate, get an estimate from a lender for consolidating and refinancing all of your private loans. Then compare the consolidated terms to each individual loan. That way, you can decide what the best deal for you is.  

Is there a minimum or maximum amount for consolidation?

Your credit rating will ultimately determine how much you can consolidate, but if your credit score is high (and you meet the all of the other requirements for a private consolidation loan), you should be able to consolidate the total amount of your private student loans.   Usually the limit is $150,000; in some cases, you may exceed that amount, but you'll have to ask the lender for specific terms.   In most cases, you must be consolidating at least $5,000 worth of loans as a minimum.   students throwing caps up after graduating at sunset Photo by Baim Hanif

Is it better to have a longer or shorter loan life?

The answer to this question depends a lot on your current financial situation. If you can only afford small monthly payments, a longer loan term (of up to 20 years) might be best for you for now.   You'll pay more in interest over the life of the loan, but the monthly payments will be lower.   If you want a shorter loan life (of 10 or 15 years), you will likely get a lower interest rate, but your monthly payments will be higher. You'll be paying more toward your principal each month, though, which means you are saving in the long run.   To maximize the financial benefit of consolidation and refinancing, go for the lowest interest rate and shortest term you can find.   Tip >> There's no limit on how many times you can refinance your student loans, so if taking a lower payment with longer loan terms makes sense for you right now take that option. You can alway refinance your student loans again when your financial situation matures and changes.  

What loans are ineligible for consolidation?

In most cases, you can consolidate any of your private school loans as long as you qualify. As always, there are some exceptions.   You cannot consolidate the following types of private school loans:
  • Loans from your parents.
  • Loans used to pay for expenses that were not qualified education needs.
  • Loans used for pre-college or some post-graduate education.
  • Loans taken out while you were below part-time student status.

Can I consolidate while I'm still going to school?

You can consolidate while you are in school, but keep in mind that you will lose your grace period if you do so.   That means your monthly payments will begin about 30-45 days after your consolidation is completed and funds are disbursed.   On the plus side, the earlier you start paying off your loans, the sooner you'll do so and the less they'll cost you.   If you want the best of both worlds, you can start making payments to your student loans while you're still in school and choose to consolidate later.  

Can I consolidate my federal student loans at the same time?

You could technically take out a private loan to pay off your federal student loans, but you probably wouldn't want to do that.   Federal loans are set at a fixed interest rate, which is likely lower than what you could get from a private lender.   If you do find a lower rate, you can consider using a private loan to pay off your federal loans.   Remember that interest rates on federal loans are currently set at 0% until December 31, 2020, as an emergency relief measure due to the pandemic.   Additionally, all loan payments and collections have been suspended. (If you are able to continue making your monthly payments, do so. The full amount of those payments will be applied to principal once all interest accrued prior to March 13, 2020 is paid).   student jumping for joy on a path on campus Photo by Chang Duong
  In most cases, you'll probably want to consolidate your private loans or refinance, and then separately consolidate your federal loans.   You'll have two payments, but you'll then be able to take advantage of the specific perks that come with federal loans, including income-driven repayment plans and loan forgiveness programs.    You can begin the process of consolidating your federal loans online.   Once you've consolidated your private loans, you'll probably have questions about repayment and about changes you might want to make in the future when your income level changes.  

Can I add additional loans to my consolidation?

No, you can't. Once you consolidate, that loan exists under its own terms.   If you want to add another loan after your consolidation is complete, you'd need to start over again. But that's okay.   You might find that the terms and conditions are more favorable to you the longer you are out of school and earning a regular income.  

Can I consolidate more than once?

Sure, you can consolidate more than once if you still have more than one private student loan.   You might not qualify for your full loan amount at first, but after you pay down your loan balances, you can go back and re-consolidate.   You might also find that you can get a lower interest rate by consolidating and refinancing a second (or third) time under a shorter loan life.   Likewise, if you used a co-signer for your first consolidation, you may want to refinance later after your credit score improves.   In a subsequent refinance, you can remove your co-signer and become the sole owner of the loan.   As your income goes up, you will establish a strong repayment history, and as you pay your loan down, you will open the door to better refinancing options.   In other words, making regular loan payments will help you get an even better deal in the future.   You should consolidate as often as it makes sense. Just remember that you need at least $5,000 in private student loans to qualify for consolidation.  

When will my monthly payments start under the new loan?

Your first monthly payment under your new loan will come due in approximately 30-45 days after you consolidate your loans and funds are disbursed.   female using her phone to check her bank account Photo by @criene via Twenty20

Should I enroll in autopay?

Definitely. Autopay ensures you never forget to make a payment, which can save you money. Late payments can get expensive because they come with hefty late fees. Most lenders offer a small discount by way of a 0.25% reduction in the interest rate on your new loan when you sign up for auto payments, which is another way you’ll save money.  

How long will I have to pay off my loan?

How long you have to pay off your loan depends on the terms you establish with your lender.   If you opted for a longer repayment plan, you probably have 20 years. If you chose a shorter term, you probably have 10-15 years.  

What happens if suddenly I can't afford my monthly payments?

If you can't afford your loan payments, contact your lender immediately. Don't just stop paying. You'll ruin your credit score that way. Plus, you'll end up with late fees and eventually land in court. Lenders can even potentially garnish your wages.   Defaulting on a student loan may mean that you'll struggle to qualify for credit or to find housing for years to come. It's just not worth it.   If you are experiencing financial hardship, lenders will often work with you to establish a flexible plan based on your current situation.   You'll still have to make payments, but you might be able to work out a deal for extra time until you can get back on your feet.  

Can I defer payments?

You can postpone making monthly payments in the following circumstances:
  • You go back to school and enroll half-time or more.
  • You are called to active duty in the military.
  • You are doing a residency for a healthcare education program (e.g. a medical or dental residency).
  • You work in an eligible public service sector (ask your lender if you qualify).

Can I make extra payments on my loan without penalty?

All education loans (federal and private) allow penalty-free prepayment.   When your private consolidation loan is simply replacing existing private student loans with a single one, the same penalty-free prepayment provision applies.   You can go ahead and pay over the monthly amount any time you’re able.    Any time you pay extra on top of your monthly payment, that money goes directly to the loan principal.   While an additional $25 a month may not feel like a lot to you, it is $300 a year that you will not be paying interest on.   Even if you consolidated under a 20-year plan, you can make higher monthly payments as if you had a 10- or 15-year loan. If you do, you'll pay off your loan faster and spend less money on interest.   Having the longer loan life means that if you do run into financial trouble at some point (like you lose some hours at work or have a medical emergency to pay for), you can revert to making the lower monthly payments for as long as it's necessary.    Repaying your private student loans may seem daunting, but consolidating them is one way to make your life easier.   Once you take control of your financial debt and find a plan that works for you, you can spend your time thinking about your career and your life moving forward.