Private Loan Consolidation and Refinancing

Can You Consolidate Private and Federal Loans?

Education and Price Tag Montage
Visual Mozart / Getty Images

Consolidating private education loans can help you simplify and lower your monthly payments. However, there are several ways to handle your debt. Learn the pros and cons so you don't make things worse and give up valuable benefits in your loan package.

Consolidation and Refinancing

Before you fill out an application, it’s crucial to clarify a few details. You’ll need to know if you have ​private student loans or federal student loans — or some of each.

Next, decide which loans to leave alone, and which ones to refinance or consolidate.

Consolidation is only available for federal student loans. This is confusing to students and graduates with private loans because “consolidating” debt means combining multiple loans into a single loan (which is possible with private student loans — when you refinance). Federal Direct Consolidation Loans allow you to combine multiple loans into one while keeping all of the benefits of federal student loans. Your interest rate becomes a weighted balance of your existing loans, and you can choose a new payoff period.

Refinancing is available for private education loans and federal loans. When you refinance, you pay off existing debts with a brand new loan — ideally, the new loan is better than the loans you’re paying off. Technically, you’re also consolidating when you combine multiple loans, but with private lenders, you can’t consolidate and keep the same benefits you get from government programs.

Consolidating Federal Loans With a Private Lender

Numerous private lenders are eager to consolidate any type of loan you have, including federal student loans. However, once you move federal loans out of Department of Education programs (and into a private program), you’ll give up the benefits that come with federal student loans — your loans will become private student loans.

Benefits of federal student loans include:

  • Income-based repayment programs that keep payments affordable when your income is low
  • Loan forgiveness, based on your career in public service or other factors
  • Deferment and forbearance: the ability to temporarily stop making payments during hard times (some private lenders offer these features, although they are typically less generous)
  • Easier to qualify for certain loans with bad credit or no credit history (and without a cosigner)
  • Subsidized interest costs while you are in school
  • Fixed interest rates that might be lower than you can get on your own
  • Grace periods that don’t require payments while in school

For more details, see the Department of Education’s explainer on private vs. federal debt. It’s possible that you don’t need those benefits, but you should at least know what’s at stake.

Refinancing Private Loans

When you borrow from private lenders (including when you refinance), you need to qualify for the loan based on your credit and income.

Credit scores are based on your borrowing history. Lenders want to see that you've successfully borrowed money and repaid other lenders. If you’ve taken out loans in the past and you always pay on time, your credit should be in good shape.

If you don’t have a history of borrowing (or you’ve defaulted on loans), you’ll need to build up your credit history to qualify for the best loans.

Your income provides the money you’ll use to make monthly payments, and lenders want to see plenty of income available each month. To determine whether or not you have the ability to repay a new loan, private lenders use a debt to income ratio. The less you pay towards debt every month ​(including credit cards and car payments), the better.

If you can’t qualify for a private loan based on your own credit and income, you can potentially get help from a cosigner. Cosigners apply for a loan with you, signing their name on the loan agreement. Lenders will add your cosigner’s income and credit information to the application, so cosigners with strong credit and plenty of income are best.

Unfortunately, your cosigner takes a big risk by helping you out — if you don’t make payments on the loan, the cosigner’s credit will suffer, and lenders can try to collect the debt from both you and your cosigner.

When consolidating private loans, you can use any type of loan you want (as long as your new lender allows you to pay off private loans).

  • Private student loan consolidation loans are designed for refinancing your private debt. Lenders offering these loans are willing to make large loans, but you’ll need to qualify for those large payments (again, possibly with a cosigner). These loans might also offer borrower-friendly features like a temporary break from payments during unemployment.
  • Personal loans from a bank, credit union, or online lender can be used for almost any purpose, including paying off student debt. With a personal loan, you don’t need to pledge collateral or use the money for a specific purpose.
  • Home equity loans use your house to secure the loan. As a result, it might be easier to qualify, and you might get a lower interest rate. However, it’s risky to put your home on the line: if you can’t make the payments, you face foreclosure (as well as credit damage). What’s more, home equity loans, also known as second mortgages, often have expensive closing costs.

Why Refinance? Why Not?

Refinancing can help you save money and simplify your life, but it can also cause problems.

Higher costs are the biggest threat when refinancing private education loans. In addition to application and closing costs, you might pay more interest over the life of your loan if you refinance. Even if you get a lower rate on your new loan, a longer repayment period (for example, a loan that will be paid off in 20 years instead of 10) can increase your costs. Before you stretch out those payments, do some quick loan calculations and compare the costs.

Lower rates, if you can qualify, are helpful. Especially if you originally borrowed with a private lender, there may be an opportunity to cut your borrowing costs. Over the past few years, your credit may have improved, or new competitors might be eager to lend at more attractive rates.

Fixed interest rates are predictable. If your loans have variable rates, you may be caught by surprise if rates skyrocket in the future. However, variable rates often start lower than fixed rates, and rates might not actually move much — only time will tell. If you can get a low fixed rate and you’re concerned about rising rates, refinancing might make sense.

If you used a cosigner to get approved, you might be able to refinance without a cosigner. Doing so gets your friends and family off the hook, and allows them to borrow elsewhere if they need to. But you might not need to refinance to remove a cosigner — ask your current lender about a “cosigner release” if this is your top priority.

Lower payments are always nice, but they might come at a price. There are two ways to lower your payment: use a lower interest rate or extend the loan repayment period (or both). If cash flow is an issue right now, you can certainly get some breathing room by refinancing — just find out ahead of time if you’re going to pay more interest for that comfort.

Fewer payments are easier to keep track of. If you’ve got loans from five different lenders, things can slip through the cracks. Refinancing and consolidating will turn five payments into one, but this might be unnecessary unless you’re getting additional benefits out of the deal. These days, it’s easy enough to automate payments and let your bank handle everything.

Private Consolidation Loans

If you have significant student debt, private lenders with a focus on education loans will likely end up at the top of your list. Because you’re not using a government program, these loans are basically just personal loans branded as education loans. As you shop among lenders, evaluate all of the features below.

Interest rates: your rate is one of the most important features of your new loan. The higher your rate, the more interest you’ll pay over the life of your loan. If you plan to aggressively pay down debt in just a few years, the interest rate is less important.

Help in hard times: federal student loans offer assistance when you’re unemployed or your income is low — you can stop paying temporarily without hefty fees or damage to your credit. Private lenders aren’t nearly as generous, but they might offer short periods of unemployment deferment and other benefits. Find out what’s available — just in case.

Criteria to qualify: banks may decline your application, but try other lenders. If you have a low FICO score, some lenders are willing to look at alternative sources of information to determine your creditworthiness. For example, they might review your history of utility payments, or they might base the decision on your income and career.

Cosigner release: right now, getting approved might be your main priority. If you’re using a cosigner, try to use a loan with a clear policy that releases the cosigner from the loan after you make a certain number of on-time payments. Your cosigner is doing you a favor — and you can return the favor by reducing their risk. Of course, you plan to repay, but accidents happen, and it's best to remove cosigners as soon as possible.