Consolidation: Definition and What It Is
Consolidation combines multiple student loans into a single new loan with one monthly payment. For federal loans, the Direct Consolidation Loan program is administered by the Department of Education. The new loan carries an interest rate equal to the weighted average of the original loans' rates, rounded up to the nearest one-eighth of a percent. No rate reduction comes from consolidation itself.
Private loans cannot be included in a federal consolidation. Borrowers who want to consolidate private student loans with federal ones are considering refinancing, which is a different process with distinct implications. Consolidating federal loans keeps them in the federal system. Refinancing moves them to a private lender and removes federal protections.
Why it Matters
Federal consolidation is worth considering for borrowers with multiple federal loans who want a single payment, or who need to consolidate to access certain repayment plans or forgiveness programs not currently available to them. It can also restart eligibility for income-driven plans on loans that were previously ineligible.
The federal consolidation loan options article on Yrefy's blog gets into when consolidation makes sense and when it does not. For borrowers weighing consolidation against refinancing, the refinance vs. settlement comparison is a relevant read.
Comparison
Consolidation and refinancing are often confused. Federal consolidation keeps loans in the federal system and does not lower the interest rate.
Refinancing replaces existing loans with a new private loan and can lower borrowers' student loan rates, but any federal loans rolled into a refinance permanently lose their federal benefits and forgiveness options.
