The latest numbers show student loan debt is now topping out at just under $1.5 trillion. Yes, that’s t as in trillion. And the average student loan debt is hovering around $35,000. 

While there’s no magic wand to eliminate your student loan debt, student loan consolidation may be a way to get at least a couple of monkeys off your back. But is it the right choice for you and your situation? Let’s find out.

• What Is Student Loan Consolidation?
• What Types of Student Loans Can Be Consolidated?
• What are the Advantages and Disadvantages of Student Loan Consolidation
• Should I Refinance or Consolidate Student Loans?
• When Should Consolidate Your Student Loan?

What Is Student Loan Consolidation?

The goal with student loan consolidation is simple: to roll all your different student loan payments into one lump payment. Ideally, this process will end with you having a lower interest rate and shorter term.

Read Also: 5 Common Student Loan Scams and How to Avoid Them

Technically speaking, the only student loans that can be “consolidated” are federal student loans. Everything else—so, private plus federal or private only—has to be refinanced. We’ll get to that in just a minute.

Here’s the deal: Student loan consolidation is the only form of consolidation we recommend—but on a case-by-case basis. It isn’t right for everyone.

Before you consolidate your federal student loans, there are two really important things you need to know.

1. You can only consolidate your federal student loans once so make it count

You pretty much just get one shot at federal student loan debt consolidation, so you need to have all your ducks in a row. Before you go through with the process, make sure you’re up to speed with how many loans you have and what their rates and terms are. You can’t consolidate private student loans, but we’ll get to that in a moment.

In some cases, you may be able to consolidate your federal loans again. But it’s usually not a good scenario if that’s happening.

It will mean one or more of the following is true: you have new loans that weren’t in the first batch, you’re in default on your Federal Family Education Loan (FFEL), or you’ve signed up for the public service loan forgiveness program. Yikes—bad, very bad and no thanks.

Sure, loan forgiveness sounds great. But when you consider all that’s required and how few people actually end up with their loans forgiven, you’re probably better off skipping that pain in the neck.

A word to the wise, if you’ve got grad school or another degree on your mind, don’t take out loans to pursue it! Not only is going into more debt a terrible idea, but if you do, don’t bet on being able to fold that loan into your consolidation.

2. You can’t lower your interest rate when you consolidate federal student loans.

The benefit to consolidating your federal loans is that you go from having two or more loans to just one. You also can take any variable rates and turn them into one fixed rate. And that can definitely make life—and budgeting—a whole lot simpler.

But don’t look to federal student loan consolidation to provide your winning ticket to a lower interest rate. What happens most often with federal student loan consolidation is that yes, you get a lower monthly payment, but it’s because you’ve extended the length of the loan. You’re paying less each month but for longer, so you don’t save money.

What Types of Student Loans Can Be Consolidated?

Before you skip off to your local bank (or start searching for loan consolidation companies), you need to know what kind of loans you have and if they’re eligible for consolidation. But, only your federal loans can be consolidated for free through the government. That means no private loans allowed.

Federal Student Loans

If you’ve got a handful of federal student loans, you might be eligible for student loan consolidation for free through a U.S. Department of Education service.

A Direct Consolidation Loan allows you to roll all of your federal loans into one payment under a new fixed interest rate (based on a weighted average of your current interest rates and rounded up to the nearest one-eighth of one percent).

A benefit of a Direct Consolidation Loan is the fixed interest rate. With a fixed rate, you can lock in those monthly payments into your budget and start attacking them with a vengeance.

But take note: There’s no cap on the interest rate on a Direct Consolidation Loan. So if you’re paying high interest rates on your loans now, you’ll likely still be paying a high rate after consolidation.

And securing a lower monthly payment could also mean you’ll be paying on your loan for longer—even up to a term of 30 years. Talk about a nightmare.

Private Student Loans

If you’ve got private loans, you can’t consolidate them with a federal Direct Consolidation Loan. But some lenders or banks will allow you to combine your private loans into one lump sum under one interest rate.

Because your rate is often determined by your credit score, a less-than-stellar score could mean you’re in for a bumpy ride. Not only that, but their interest rates are also usually higher than a direct consolidation of your federal loans. Double ouch.

There is a silver lining though. If you’re getting slammed by loans with variable interest rates, talk to your lender about combining your loans under one new fixed interest rate.

Private and Federal Student Loans

If you’re like most graduating students, you probably have a mix of both private loans and federal loans. If that’s the case, you’ve probably found out how hard it is to consolidate these types of loans together into one happily blended family.

If you’re looking to roll private loans or a mix of federal and private loans into one, you’ll have to go through a private lender under a process called “refinancing.”

What are the Advantages and Disadvantages of Student Loan Consolidation

It’s important to remember that there are different types of loans — most significantly, there’s a big difference between federal loans (those issued by the U.S. government) and private loans (those issued by a bank, credit union, or other lending institution).

Each has its own pros and cons, which we’ll get into in a little bit. But in general, here are some of the benefits and potential drawbacks when considering student loan consolidation.

Advantages

• Simplicity: Consolidating your student loans can make dealing with them a little less unwieldy, with just one or two monthly payments and one or two accounts to keep track of. (Many sources advise against consolidating private loans with federal loans — instead, they recommend that you consolidate your federal loans into one loan and private loans into another.) If you’re forgetting to make payments and have difficulty keeping track of all of your different loans, this can keep you organized and help you to avoid missing payments — which can result in late fees or damage your credit.
• Potentially lower payments: Consolidation can potentially lower your total monthly student loan payment with either a lower interest rate or longer repayment period, but this depends on the interest rates and terms of your current loans. This is especially beneficial if you’ve been struggling to make payments and can’t qualify for a deferment or income based repayment plan.
• Better credit, better rates: If you’ve graduated and gotten a (hopefully) great job, and have been making responsible financial choices such as keeping your credit card balances low and making payments on time, your credit score may have gone up. If your credit score has improved since you initially took out your loans, you may be eligible for a lower interest rate on a new consolidation loan since lenders will consider you less of a risk than you previously were. This will obviously depend on your credit history, the rates on your existing loans, and the interest rates your new lender can offer you.
• Dodge default: One in 10 borrowers has defaulted on federal loans, according to the Department of Education. If you’re in default, loan consolidation can offer a solution, since it can possibly lower your monthly payment, depending on your loans. You may be required to get your loans into good standing before being able to consolidate them, though.

Disadvantages

• Loss of benefits: Depending on your loans, you may lose certain borrower benefits if you combine your loans. Examples include loan forgiveness — where all or a portion of your loan debt can be cleared if you meet certain conditions — flexible or income-based payment options, or deferments.
• Potentially higher rates: Depending on your current interest rates and loan amounts, you can actually end up paying higher interest rates and increasing the overall amount you owe. You may end up paying more on your loans than you would have if you did not consolidate them.
• Longer repayment period: While it can lower your initial payment, a consolidation loan can lengthen the duration of your debt, and you may end up actually paying more over time.
• Beware of variable rates: When consolidating your private loans with a private lender, you may be offered a low but variable interest rate (as opposed to a fixed rate). That means the rate can increase over time — sometimes dramatically so — and therefore so can your payments.

Should I Refinance or Consolidate Student Loans?

Refinancing and consolidation are two ways to bundle multiple student loan payments into one—and in the case of refinancing, potentially save money on interest. Whether to go for one of these options, though, depends on the type of loans you have and how much you stand to save.

Total student loan debt currently stands at about $1.5 trillion, according to the Federal Reserve, and it affects how borrowers can save, spend and set goals.

A recent Federal Reserve report found that 20 percent of the drop in homeownership among 24- to 32-year-olds between 2005 and 2014 was due to an increase in student loan debt.

Here’s how to decide whether refinancing or consolidating your student loans could make your finances more manageable.

How Do Student Loan Consolidation and Refinancing Work?

There are two methods for combining several student loans into one: federal consolidation and private consolidation, which is also known as refinancing.

In either case, you’ll end up with a single loan payment, which can streamline your bills if there are several creditors billing you for separate loans each month. One payment could make you more likely to pay on time, which is the biggest factor in maintaining a strong credit score.

Refinancing has the added benefit of reducing the cost of your loans if you qualify for a lower interest rate or monthly payment. Be sure to weigh the tradeoffs before refinancing, though, especially if you include federal loans in the bundle.

Consolidating and Refinancing Federal Student Loans

Federal student loan consolidation is, as it sounds, available only for federal loans, or those the government makes. You do not need to meet credit requirements to consolidate federal loans, and after consolidating you’ll pay a single bill to your student loan servicer, the company that accepts payments on behalf of the government.

But you also won’t get a lower interest rate. Your new interest rate will be a weighted average of your previous loans’ rates, rounded up to the next one-eighth of 1 percent. That means the interest rate on your largest loan balance will have the biggest impact on your final rate.

You can apply for a federal direct consolidation loan for free online through the U.S. Department of Education.

Federal Student Loan Consolidation Key Considerations

Consolidating federal loans comes with several unique benefits:

No credit or income requirements: Anyone with federal student loans can get a consolidation loan. Your credit scores, income and other financial factors are not used to determine your eligibility, and you don’t need a cosigner. You may even consolidate as a way to get out of student loan default, as long as you either make three on-time payments beforehand or choose an income-driven repayment plan. More on those next.

Flexible repayment options: Federal student loan borrowers can choose among several repayment programs. The standard payback period is 10 years, but there are other programs, called income-driven repayment plans, that tie loan bills to income. Choosing one could make your payments much more affordable.

Any remaining debt after 20 or 25 years of on-time payments toward an income-driven plan will be forgiven, though you’ll pay tax on that amount. Certain public service workers may qualify for loan forgiveness in just 10 years, tax-free.

Extending your payback period can be tempting, since it will reduce your monthly payment. But the longer you take to pay off a loan, the more interest you’ll pay over time. The sooner you can pay off your student loans, the sooner you can divert more of your savings to retirement, a home down payment or college savings for your kids.

Also, if you’re already working toward federal loan forgiveness, consolidating loans may wipe out any credits you have already earned. Consolidating Perkins loans will disqualify you for forgiveness programs specific to those loans, but you can always leave them out of the consolidation process.

The ability to pause payments: Federal loans come with forbearance and deferment programs that let you take a break from payments if you lose your job, get sick or go back to school. If you don’t know when you’ll be able to get back on track, though, consider a longer-term solution like switching to income-driven repayment.

While it sounds morbid, federal loans are also forgiven if the borrower dies. That means your estate or heirs don’t have to pay back the debt.

Consolidating and Refinancing Private Student Loans

Unlike federal student loan consolidation, refinancing is available for both federal and private student loans. A bank, credit union or online lender will pay off the loans you want to consolidate and issue you a new private student loan for the total balance.

Refinancing is credit-based, meaning your credit score is a primary factor in whether you qualify and the new interest rate you’ll receive. The lender will also take your income and current debt-to-income ratio into account.

If you’re eligible for a lower rate than you currently pay, you could save a significant amount on interest, making it an especially appealing option for borrowers with high-interest private loans.

Private Student Loan Consolidation Key Considerations

Before taking the plunge to consolidate and refinance student loans with a private lender, consider the following:

Your credit score matters: Those with high credit scores will get the lowest interest rates on a refinance loan. You’ll be a strong candidate if your credit score is in the good-to-excellent range, which is 670 or higher using the FICO^® credit scoring model. Check your credit report for errors and address them before you apply. That will help get your credit score in shape.

You can add a cosigner: If your financial background keeps you from qualifying for student loan refinancing, you have the option to use a cosigner. A parent, sibling or other responsible co-borrower can improve your eligibility or help you get a lower interest rate.

Be sure that the person understands the risks, though. They’ll have to repay the debt if you can’t, and that can be a major burden on parents nearing retirement age, for instance.

Variable interest rates may go up: Most refinance loans offer both variable and fixed interest rates. But variable rates are just that: variable, which means they can go up or down depending on economic conditions.

It’s hard to predict when the Federal Reserve will raise interest rates,so opting for a variable rate likely isn’t wise unless you plan to pay off your loan quickly.

Look for discounts: Lenders often provide an interest rate discount for making automatic payments each month. If the lender is a bank, you could also qualify for a loyalty discount for paying your bill from an associated bank account.

Be Careful When Considering Refinancing Federal Loans

Private student loans, as a rule, don’t offer the same flexibility federal student loans do. Turning federal loans private through refinancing is a big gamble: You’ll lose access to income-driven repayment and long periods of deferment and forbearance. Check refinance lenders’ policies on these features before signing any loan agreement.

If you have a strong income and job security and know you won’t have to rely on federal loan benefits, however, refinancing may be worth the risk.

Plus, you can always refinance your private loans only, or just a portion of your federal loans. An honest evaluation of your whole financial picture will help you make the decision that’s right for you.

When Should Consolidate Your Student Loan?

You’re eligible

• You’re not in school currently, or you’re enrolled less than part-time.
• Your loans are not in default.
• You’re either making loan payments or in the loan is in a grace period.
• Your loans are in your name, not in your parents’ names or anyone else’s; you cannot consolidate your loans with your spouse’s loans.

Also important to know: you can’t consolidate private student loans with federal student loans. If you want to roll private and student loans together, you’ll need to explore refinancing your student loans.

And depending on your lender, you may need to meet a minimum balance. (The Federal Loan Consolidation Program doesn’t require a minimum.)

You want to reduce your monthly payments

If short-term savings are your priority, consolidation is worth a look. You can lower your monthly payments and increase your repayment period.

Lower monthly amounts, though, mean you pay more over the loan’s life. Compare your current monthly payments to what the payments would be if you consolidated. Keep in mind: the longer your repayment period, the more interest you’ll pay.

If you want to consider refinancing, Money Under 30 partner Credible offers a free and easy way to see the loan rates and monthly payments you would qualify for from selected lenders — there’s no obligation or impact to your credit.

Your individual loans don’t offer flexible repayment options

Make sure you know the borrower benefits of your original loan before you consolidate. These include rebates, loan cancellation benefits, and interest rate discounts. Once the original loan disappears, you lose those benefits. PLUS loans, for instance, may have flexible repayment options unavailable after consolidation.

Loan consolidation may offer just the wiggle room you need, however, if your original loans are more rigid. Here are some common consolidation payback plans.

• Extended repayment, where you can have between 12 and 30 years to pay.
• Graduated repayment, where you begin payments at a low monthly amount that increases gradually every two years.
• Income-contingent repayment, where you calculate your income and outstanding debt, and your lender sets a repayment amount for you based on the total. As your income changes, this amount changes.
• Income-sensitive repayment, where your monthly payment is a percentage of your pretax monthly income.

You want a lower interest rate

Who doesn’t?

But before you make the switch, here’s what you need to know. If you took out federal loans before 2013, you may have one of two types of interest rates: variable or fixed.

Variable interest rates can adjust each month, based on the interest rates available at the time. Initially, these rates may be lower than the interest on fixed-rate loans. If interest rates rise, however, your loan interest will rise with them.

Same thing if interest rates fall. You’re at the mercy of the market. If you plan to pay off loans quickly when interest rates are low, a variable rate’s a good option.

In August 2013, the Bipartisan Student Loan Certainty Act of 2013 became law. Under this act, new federal loans have fixed interest rates determined each spring for the upcoming year. If you took out loans after the act was passed, you’ll have a fixed rate, not a variable one.

So what’s a fixed interest rate?

Fixed interest rates stay the same for the life of the loan. You’re more likely to have the same monthly payment each month. The initial interest rate (when you first sign on) may be higher.

Say you have pre-2013 federal loans with variable rates. Consolidation will allow you to switch from a variable rate to the new fixed rate. If you plan to repay loans over time, and you’d rather have a steady interest rate than a fluctuating one, a fixed rate may work best for you.

Will the fixed-rate mean you pay less overall? Possibly. A variable-rate can save you money if you have strong credit – and if interest rates don’t rise significantly. For long-term savings, it’s best to lock in a fixed rate when interest rates are low.

Your credit score’s improved since getting the loan

Lenders love good credit. If you have private loans, they won’t be covered under the Bipartisan Student Loan Certainty Act, but you can still lower your interest rate through consolidation. Private student loans base interest rates on your credit score.

This means if you’ve had a jump in your credit rating, you may be in a good position to consolidate private loans. The higher score gets you lower interest.

You’ve just graduated and haven’t entered repayment

There’s a window of time, after you graduate but before your grace period ends, when you can still get the lower in-school interest rate. Many federal loans give you six months.

Act quickly, though. All consolidation paperwork must be processed and approved in those six months for the in-school rate. And once the consolidation goes through, you enter repayment – even if you’re still in the grace period. For graduates who want to get the ball rolling with repayment, consolidation may make sense.

You anticipate a change in income or expenses

Maybe you’re in a contract position with an end date, on track to a better-paying job, or planning to stay home with a child. If your life circumstances are changing, you may want to adapt your loan repayment plan to match.

For instance, if you’re on a ten-year repayment plan with your original loans, consolidation could get you an extension or offer the income-contingent payback plan. Consolidation also restarts the clock on deferments and forbearances, giving you extra time for each.

How can I consolidate my student loans

There are two options for consolidating your student debt. The federal student loan consolidation option offered by the U.S. Department of Education is the Direct Consolidation Loan.

“With this option, any federal loans that you choose to consolidate are paid off and you are issued a Direct Consolidation Loan for the total combined balance,” says Jessica Ferastoaru, student loans specialist for Take Charge America.

You can complete the Direct Consolidation Loan application online. Once submitted, it may take 60 days for your application to process, says Ferastoaru.

“You should continue to make your regular payments on your loans, if payments are currently due, until your consolidation has been approved,” explains Ferastoaru. “Once approved, you will have one monthly payment due to the new servicer managing your Direct Consolidation Loan.”

Yet another option is a private loan refinance, meaning you combine your federal student loans or your private student loans, or some combination of both, with a private lender.

Private loan refinancing has some significant drawbacks to be aware of, however, including different eligibility criteria.

“You will need to meet certain income and credit score requirements to qualify,” says Ferastoaru. This means a co-signer may be required to qualify.

Read Also: Should you Pay off Student Loans While in College?

More importantly, it’s critical to understand that if you consolidate federal loans with a private lender, you’re no longer eligible for any federal programs, such as those that allow you to postpone payments when you’re unemployed.

In addition, you will no longer be eligible for federal income-driven repayment options, loan forgiveness or any sort of loan discharge.

How can I get the best interest rate?

If you’re consolidating your student loans through the federal government, your overall interest rate will remain the same. This is because a Direct Consolidation Loan charges the weighted average of all loans you’re consolidating.

However, it’s a different story if you’re refinancing with a private lender. Interest rates are determined by the federal government and change each year on July 1, so it’s a good idea to shop around with lenders to see how they respond to rate fluctuation.

Improving your credit score will also help you get the best loan rates possible, says Katie Ross, education and development manager for American Consumer Credit Counseling.

“Having a good credit score is the key to getting the best interest rate with any loan,” says Ross. “A credit score of 750-plus is generally considered good, with 800 or higher considered exceptional. The higher your credit score, the better your interest rate when you apply for a loan.”

Last Words

There are many options when considering loan consolidation, so make sure to do your homework and investigate all the possibilities before applying.

But bear in mind that if you have federal student loans, consolidating through the U.S. Department of Education program may ultimately provide the best option over the long term, allowing you to remain eligible for income-driven repayment programs, loan forgiveness, or loan discharge.