Student Loan Consolidation Guide

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Student loan debt is a grave concern in modern America. In fact, the amount of debt from student loans topped at the end of 2016, and graduating from public and nonprofit colleges have student debt – the average is $30,100. It takes borrowers an average of to repay their student loans, while 28% of students are in default (or miss payments for 270 days or more) within five years of entering repayment.

The picture painted by these statistics is clear: many borrowers are in over their heads with student loan debt and are looking for relief. Student loan consolidation or refinancing can be a great tool to use for those looking to save on, or simplify, their monthly payments, but going that route can also have serious consequences if not approached carefully – there are even to be aware of.

That’s why we created this guide – to give borrowers a useful resource that empowers them to choose if student loan consolidation is right for them and which type may best suit their needs. We start by discussing the basics of student loan consolidation and refinancing, and comparing the benefits and drawbacks of federal and private consolidation loans. We then detail a step-by-step guide to using and choosing consolidation loans. The last section is dedicated to identifying the best private consolidation loans for those with a few different financial profiles.

The Basics of Student Loan Consolidation and Refinancing

There are two types of consolidation loans: federal and private, and they each come with distinct advantages and drawbacks. Federal consolidation loans can only be used for federal student loans, but private consolidation loans can be used for both federal and private student loans. Consolidation loans repay old loans with a brand new loan that has its own unique terms and conditions. The basics of federal and private consolidation loans are outlined below.

Federal Consolidation Loans

How Federal Consolidation Loans Work

Borrowers can combine multiple (at least two or more) federal loans into a single (this is the only federal consolidation loan available). All types of federal student loans can be consolidated together except a Direct PLUS Loan that was taken out by a parent to help pay for a child’s education (student PLUS loans can still be consolidated). However, private loans can’t be included in a federal consolidation loan.

The new Direct Consolidation Loan provides a single fixed interest rate that is equal to the weighted average of all the loans being consolidated, and the interest rate is rounded up to the nearest eighth of a percent (0.123%). A weighted average means that the loans with a higher balance influence the interest rate more than loans with a smaller balance – the overall impact of each old loan on the new interest rate is proportional to the comparative balance of that loan.

Because the interest rate is a weighted average and rounded up, borrowers won’t ever save money on interest by opting for a federal consolidation loan unless the loans are pre-2006 and have a variable interest rate. The new interest rate would still be equal to the current interest rates in that situation, but it might save money in the future if the variable rates rise (the new fixed rate would stay the same).

The following table illustrates how a weighted average works. In this example, there are three students that each have three loans. A provided by US Bank was used to calculate the weighted average.

Borrowers who are out of college or are attending classes less than half-time can consolidate their federal student loans. Only loans that are in repayment or in the grace period are for consolidation, and a Direct Consolidation Loan must include at least one . Loans that have been in default can be consolidated after three consecutive monthly payments have been made or if the borrower agrees to repay the consolidation loans under an income-driven repayment plan (where the payments are based on the income of the borrower).

Private Consolidation and Refinancing

In short, the term “consolidation” is used to describe the process of combining multiple loans into a single loan while the term “refinancing” is used to describe the process of using a more advantageous loan to repay an older loan. While refinancing is often used in other realms of finance (like mortgages) to describe repaying a single older loan with a new loan, consolidating with a private loan technically includes refinancing as well since the term and interest rate of the new loan are different from the old loans. Getting a federal consolidation loan isn’t usually considered as “refinancing” since the interest rate of the new loan is equal to the weighted average of the loans being consolidated.

With a private consolidation loan, a private lender writes a new loan that pays off the old loans. The interest rate is primarily determined by the lender’s evaluation of the borrower’s credit history. However, some lenders also factor in the borrower’s current financial and professional circumstances. The new interest rate can be lower or higher than the weighted average of the old loans and can be fixed (the interest rate won’t ever change) or variable (the rate changes based on the market conditions).

Private and federal loans can both be refinanced with a private consolidation loan. To be eligible, borrowers must have a clean credit history and a “good” FICO credit score (“good” is 670 and above according to ). Borrowers with a poor credit history may still be able to qualify if they can secure a cosigner with good credit.

Some lenders require that the borrower’s be below a certain threshold. Many lenders also factor in a borrower’s employment stability and prospects – they may even have minimum annual income requirements. Additionally, certain lenders only offer loans to those who have graduated or have completed a specific type of degree.

Federal Versus Private Consolidation

Federal and private consolidation loans both have unique advantages and drawbacks – not one option is right for everyone. This section compares and contrasts the two types to help borrowers determine which is right for them.

Overall, borrowers should consider a federal consolidation loan if:

  • They have federal loans with variable interest rates (pre-2006)
  • They want to combine a large number of federal loans to get one simple payment
  • They need to lower their monthly payments, and are okay with paying more over the lifetime of the loan
  • They have federal loans that for income-driven repayment plans

The following list details some of the benefits of federal consolidation loans:

  • Free: There are no origination fees or other costs to consider.
  • No Credit Check or Cosigner: Borrowers with less-than-optimal credit don’t have to worry about a credit check or finding a cosigner.
  • Smaller Monthly Payments: Federal Direct Consolidation Loans can be repaid on an (the monthly payment is based on the borrower’s income) which may result in a lower overall payment. Also, consolidation loans typically lead to a longer repayment term which allows for smaller monthly payments.
  • Deferment and Forbearance: Those who encounter hardship (like serious illness or a loss of work) have that enable them to stop making payments for a period of time without entering default.
  • Federal Student Loan Forgiveness: Direct consolidation loans have access to if the borrower qualifies.

There are also drawbacks to federal student loan consolidation to consider:

  • Won’t Save Money: Since the new interest rate of a Direct Consolidation Loan is the weighted average of the old loans, no money will be saved over the life of the loan. In fact, the interest rate is rounded up to the nearest eighth of a percent so the new loan might actually have a slightly higher cost overall.
  • Could Cost More: If the new repayment term is longer than the length of the loans being consolidated, more interest will be charged over the life of the loan unless it’s paid off before the end of the term (this strategy requires additional payments or paying more than the minimum payment due each month).
  • Loan Forgiveness Progress Is Lost: Loan forgiveness requires borrowers to make a certain number of qualifying payments on the loan while meeting certain conditions (like working as a teacher or paying under an income-driven repayment plan). Since consolidation involves a brand new loan, progress towards student loan forgiveness is reset.
  • Can’t Prioritize High-Interest Loans: If borrowers have lower interest loans (typically undergraduate) and higher interest loans (typically graduate), consolidating them all together will make it impossible to prioritize paying off the higher interest loan first (by paying extra on that specific loan).
  • The Consequences of Defaulting Are Severe: Unlike private lenders, the federal government can garnish the wages or use tax refunds to repay student loans that have entered .

Private Consolidation Advantages and Drawbacks

Since a private consolidation loan can be used to refinance both federal and private loans, private consolidation loans could be used to consolidate only private loans, federal and private loans, or only federal loans – this means that there are several scenarios to consider. Two scenarios are considered below: consolidating private student loans and consolidating federal student loans using a private loan.

Those with a higher income who want to pay off their loans as quickly as possible may be able to use a private consolidation loan to reduce the amount of interest paid on certain federal loans. The following conditions would need to be met to make this strategy beneficial:

There are three main advantages to private consolidation loans:

  • Lower Interest Rates: Private consolidation is the only way to refinance both federal and private loans with the potential of a lower interest rate which can result in lower monthly payments and more savings over time.
  • Can Release a Cosigner: Some lenders might be willing to consolidate old loans that were cosigned into a new loan without the cosigner.
  • Longer Repayment Terms: Private lenders may allow for the repayment term on a consolidation loan to be extended past that of the old loans – this will save money on the monthly payment, but will increase the overall cost of the loan.


While private consolidation loans can be beneficial, there are significant drawbacks to consider – especially when consolidating federal loans with a private loan.

  • Strict Requirements: Borrowers will need to undergo a credit check as only those with an above average FICO credit score will typically be eligible. If a person’s credit isn’t great, a cosigner may be required. Additional requirements like degree completion or annual income thresholds may also apply.
  • Inconsistent Rates: While the rates for federal consolidation loans can be determined ahead of time, borrowers must shop around for rates from private lenders who all evaluate borrowers somewhat differently. However, the evaluation is based primarily on the borrower’s creditworthiness and economic factors.
  • Fees: Some lenders charge origination fees (usually in the range of 1% or 2%). While these don’t usually have to be paid up front, they can be tacked onto the loan balance and result in additional interest being charged.
  • Limited Loan Terms: Loan terms for private loans tend to be shorter than those of federal consolidation loans. Federal consolidation loans range from 10 to 30 years while private consolidation loans typically range from 5 to 20 years.
  • Few Fringe Benefits: Compared to the benefits that federal consolidation loans offer, private consolidation loans don’t offer much help for borrowers with hardship or those who are seeking loan forgiveness. For example, forbearance isn’t always granted if a person were to lose his or her job. Also, borrowers consider that fringe benefits (such as interest reduction after a certain period of on-time payments) from current private loans will be lost.

Scenario #1

The first scenario shows four possible options for a borrower who has a total of $20,000 in federal student loans, and a total of $10,000 in private student loans. This borrower (Borrower A) has excellent credit and can secure a private consolidation loan with an interest rate of 3.7%. The weighted average for a federal consolidation loan for Borrower A is 4.25%. The federal consolidation has a loan term of 20 years, and the private consolidation loan has a term of 10 years. If they are consolidated together into a private loan, the consolidation term is 15 years.

This scenario demonstrates the impact of choosing to consolidate federal student loans with a private consolidation loan when the Direct Consolidation Loan interest rate is even .5% higher than what can be obtained from a private lender. If only the minimum payments were made (Options 1 & 3), the savings by choosing the private consolidation loan would be about $2,500. If extra was paid (Options 2 & 4), then the savings would still be about $1,500.

It’s important to note that the interest rate from the private lender in this example would only be available to those with excellent credit and a secure financial future. There are other factors to consider (the side benefits of federal consolidation loans for example), and there are additional strategies not covered in this scenario that some borrowers may be able to utilize.

Scenario #2

The second scenario uses the same loan amounts and parameters as the first, except the borrower (Borrower B) isn’t able to get an ultra-low interest rate on her private consolidation loan – it’s set at 4.75%. The weighted average for the Direct Consolidation Loan is still 4.25%. The loan terms remain unchanged in this scenario.

This scenario shows that choosing a private consolidation loan that has even a slightly higher interest rate (.5%) then the interest rate available with a Direct Consolidation Loan can cost quite a bit of money. Option 2, which has an equal monthly payment to that of the private consolidation loan (Option 3), saved Borrower B $1,500 and six months of payments.

How to Use Consolidation Loans Effectively

Consolidating Federal Student Loans with a Private Lender

Strategy #1: Consolidate Federal and Private Student Loans Separately

Due to the benefits that federal student loans come with and the lower than average interest rates, many experts recommend consolidating federal and private student loans separately. Those who only have federal or only have private can consolidate them with the corresponding type of loan. Those who have a mix can use a Direct Consolidation Loan for their federal loans, and then select a private lender to consolidate and refinance all their private loans.

Strategy #2: Consolidate Less Favorable Federal Loans and Private Loans Together

Graduate loans tend to have higher interest rates. For example, a current PLUS loan comes with an of 6.31% which is almost double the interest rate of a Direct Loan for undergraduates (3.76%). Consolidating undergraduate loans with a federal loan and then consolidating graduate loans and any private loans with a private lender has the potential to save money, provided a low-interest private loan can be obtained.


The following example shows the potential savings that could be achieved by consolidating graduate loans with a lower interest private loan. In this example, both borrowers have $30,000 in student loans. The student loans consist of $10,000 in private loans at 7%, $10,000 in federal undergraduate loans at 3.75%, and $10,000 in federal graduate loans at 5.75%.

In this scenario, Borrower A consolidates all the federal loans together with a weighted interest rate of 4.75%. Borrower B consolidates the private loans and the federal graduate loans with an interest rate of 4.25% which keeps the weighted average of the federal consolidation loan down to 3.75% (the federal consolidation loan is lower in this case since the higher interest rate of graduate loans aren’t factored in).

The overall savings obtained in this scenario by consolidating the high-interest federal loans with a lower interest private loan (as opposed to consolidating all the federal loans together) is over $1,500. It’s important to remember that this kind of savings only happens if the credit of the borrower is exceptional. The savings that can be achieved with this strategy also needs to be weighed against the value of the benefits available from federal consolidation loans.

What to Consider Before Consolidating High-Interest Federal Loans

Borrowers who have some high-interest and some low-interest federal student loans should consider consolidating them separately. The reasoning behind this advice is that it’s not possible to prioritize paying off high-interest federal student loans over lower interest loans if they are consolidated together. Even if the borrower can only afford the minimum payment now, he or she may want to save on interest by paying extra later on.


In this scenario, a borrower owes $20,000 in federal undergraduate loans (whose weighted average interest is 3.7%), and $10,000 in federal graduate loans (whose weighted average interest is 6.3%). There are two ways to use a Direct Consolidation Loan in this scenario.

  • Option 1: Consolidate all the loans together which would result in a weighted average interest rate of 4.63% and a $30,000 loan with a repayment term of 20 years.
  • Option 2: The second option is to consolidate the lower interest undergraduate loans separately from the higher interest graduate loans. This results in two consolidation loans: Loan A is a 20-year, $20,000 loan with a 3.7% interest rate, and Loan B is a 10-year, $10,000 loan with a 6.3% interest rate.

The following table illustrates the savings that can be achieved by utilizing “Option 2.” For Option 1, $59 was added to the monthly payments to make both payments equal, and for Option 2, $20 extra was paid a month to simulate using this strategy to pay off student loans more quickly. Option 2 allowed the extra to be put towards Loan B first, and then that payment amount was applied to Loan A once Loan B was paid off.

This example showed the benefit of consolidating high-interest federal student loans separately from low-interest student loans if a Direct Consolidation Loan is being used. The ability to pay extra on the higher interest loan (Option 2) while paying the minimum payment on the lower interest loan allowed for over $1,000 to be saved in this scenario – all this was with the same monthly payment as Option 1. Borrowers who are struggling to make payments and want to work towards loan forgiveness with an income-based repayment plan may not benefit from this strategy, but it can be very helpful for those who are trying to pay off their student loans as soon as possible and with the least overall expense.

How to Choose Between a Variable and Fixed-Rate Loan

Note: Since all federal consolidation loans come with a fixed interest rate, this section only applies to those considering private consolidation loans.

The interest rate of a fixed-rate loan is guaranteed to stay the same throughout the life of the loan (except if there are penalties or discounts written into the contract). A variable rate, on the other hand, changes based on economic conditions. There are distinct drawbacks and advantages to both which are outlined below.

The Drawbacks and Advantages of Fixed-Rate Loans

Fixed rates come with several advantages, such as:

  • Security: There’s a sense of security that comes in knowing that the interest rate won’t rise no matter how much the economy changes.
  • Budgeting: Borrowers know ahead of time exactly how much they will pay in interest throughout the life of the loan and what their payments will be each month.
  • Can Refinance: If interest rates fall dramatically, a fixed rate loan can be refinanced to a lower rate.

The drawback for fixed rate loans is that their interest rates are typically between 1% and 2% higher than variable rates to start off with. Even a 1% difference in interest can cost thousands over the lifetime of the loan (if the variable rate stays the same which isn’t likely).

How Variable-Rate Loans Work

Private Lenders offer loans with interest rates that rise and fall based on the performance of a specific index. The index that most lenders base their rates on is the United States Prime Rate which is the rate banks charge each other for short-term loans. That rate changes as the Federal Reserve influences the (the Wall Street Journal publishes this rate by polling the major banks – more info can be found ).

LIBOR (The London Interbank Offered Rate) is also a common index on which lenders tend to base their variable rates. This index is used by many international banks to determine the rates they charge each other for short-term loans. It’s basically the equivalent to the US Prime Rate in function, but the actual rate is almost always lower than the prime rate.

The way this works is that a spread of percentage points is added or subtracted from the index. Depending on the lender, and the borrower’s creditworthiness, a point or two could be subtracted, or up to 10 percentage points could be added to the index. The bottom line is that variable interest rates rise or fall in direct proportion to the behavior of a particular index.

Here’s an example of how this works: if the Federal Reserve changes the federal funds rate from 0.75% to 1.0%, the banks may change their prime rate from 3.75% to 4.0%. The specific lender might then adjust the borrower’s variable-rate loan from 4.75% to 5.0%.

Variable interest rates usually have a “rate cap” which means that the rate is guaranteed not to rise past a certain point. However, most rate caps are set comparatively high (10-15%). Lenders can adjust the interest rate monthly, quarterly, or annually depending on the conditions of the loan.

The Drawbacks and Advantages of Variable-Rate Loans

The appeal of variable-rate loans is that they usually start out with interest rates that are between one and two percentage points lower than fixed-rate loans. A substantial sum of money could be saved if the variable rate stays lower than the potential fixed rate for a significant portion of the loan term.

Unfortunately, there are several significant drawbacks to variable rate loans:

  • Risky: While variable rates are cheaper to start out with, they may increase over time and end up costing more money in the long run.
  • Unstable: The payment amount on variable-rate loans could change monthly, quarterly, or annually (depending on the terms and conditions of the loan). Either way, there’s no way to guarantee what the payment will be on a variable-rate loan several years down the road.

Side-by-Side Comparison

Borrowers who are trying to decide between variable or fixed rates can use the following example to understand the impact of this decision more clearly.

In this example, there are two borrowers. Borrower 1 chooses fixed rates, while Borrower 2 opts for variable rates. Both are considering two consolidation loans: Loan A is a $15,000 loan with a 10-year term, while Loan B is a $30,000 loan with a 20-year term.

  • Borrower 1: He secures a 4.0% variable interest rate for both of his loans. That means that Loan A is $15,000 for 10 years at 4.0% APR, and Loan B is $30,000 for 20 years at 4.0% APR.
  • Borrower 2: She can obtain a 5.25% fixed interest rate for her loans. Loan A is $15,000 for 10 years at 5.25% APR. Loan B is $30,000 for 20 years at 5.25% APR.

Note: Since it’s not possible to predict exactly how variable interest rates will behave, this example makes a conservative assumption.

There are several key insights to highlight from this table:

  • Borrower 1 saved money ($300) by going with a variable rate for Loan A ($15,000 for 10 years). However, the amount of savings didn’t justify the risk that interest rates would climb more quickly. Of course the savings would be larger if interest rates didn’t gradually rise or if they dropped during the repayment period of the loan.
  • Borrower 2 saved almost $5,000 by going with a fixed rate on Loan B ($30,000 for 20 years) even though the initial interest rate was higher than what Borrower 1 secured with a variable-rate loan.

Who Should Use Fixed-Rate Loans

Those who are consolidating large loan amounts that will require more than 10 years to repay should consider a fixed rate loan. The reason for this is that historical data indicates that interest rates will trend upwards. However, it’s important to remember that past performance isn’t a guarantee of future performance, and there’s no guarantee that rates will fall, increase, or stay the same.

The following chart illustrates that interest rates are historically low, and may trend upwards in the future.

The smaller the gap is between a fixed-rate loan and a variable-rate loan, the more it makes sense to stick with a fixed rate since interest rates will most likely go up. The longer the period of time is before a variable interest rate rises above the fixed rate, the more attractive a variable rate loan is.

For instance, if the best loans are only offering a 1% difference between the fixed and variable rate loans, the fixed rate loan may be the wiser choice. If the difference is closer to 3%, then the variable-rate loan may be a better choice (depending on the borrower’s unique circumstances and taking into consideration the factors discussed above such as term length and loan amount). Borrowers should keep in mind that lower interest rates at the beginning of a loan result in more actual savings than lower interest rates towards the end of a loan since the principal is lower as time goes by (interest charged is a percentage of the current loan balance).

Who Should Use Variable-Rate Loans

Those who are planning on paying off student loans as quickly as possible within a relatively short amount of time (like 5-10 years) may be able to save money with a variable rate loan. While interest rates may rise, they aren’t likely to spike several percentage points overnight. Even if a spike in a borrower’s interest rate results in more interest being paid for the last year or two, the overall average interest rate may be lower. Another factor to consider is that a higher interest rate later won’t have as big of an impact as a higher interest rate now if the loan term is a relatively short.

Repayment Term Length

Federal Consolidation Loans

With a Direct Consolidation Loan, borrowers don’t choose the length of the repayment term. Instead, the term is either based on the total indebtedness (including private loans) or the income of the borrower. Under the income-based repayment plans, the payment due is a percentage of the borrower’s income, and after a certain number of qualifying payments (generally 20 years), the remaining loan balance is forgiven.

The standard and graduated repayment plans both base their term length off of the following table:

While borrowers can’t voluntarily lengthen their repayment terms, they can choose to shorten them by paying more than the minimum payment. The more that is added to the monthly payment, the shorter the loan term becomes.

Private Consolidation Loans

Repayment terms vary from lender to lender, but they are typically shorter than those offered by the government. The range of federal consolidation loans is 10 to 30 years, while private consolidation loans usually range from 5 to 20 years. It’s important to note that private lenders may charge a higher interest rate for a longer term.

Longer vs. Shorter Repayment Term Lengths

When consolidating loans, a longer repayment term will almost always be available or assigned (in the case of federal consolidation loans). Borrowers with a federal consolidation loan still have to decide between different repayment plans and must decide whether to make more than the minimum required payment. Those contemplating private consolidation loans will likely have a chance to choose a shorter or longer consolidation term as well.

The main benefit of a shorter term length is that it forces borrowers to pay a higher monthly payment which results in less interest being paid overall. Additionally, private Lenders may offer a lower interest rate for a shorter term length.

The benefit of a longer term length is a lower monthly payment. While that may result in more interest being paid over the term of the loan, a lower monthly payment allows for the following:

  1. Flexibility: While a longer term length allows for a lower monthly payment, borrowers could also opt to pay more – this allows for more flexibility as job and life changes occur.
  2. Helps to Avoid Default: Borrowers who are struggling to make payments can avoid defaulting on student loans by consolidating or refinancing with a longer repayment term which lowers the minimum monthly payment.
  3. More Ability to Pay Down Other High-Interest Debt: A longer repayment term allows for a lower monthly payment which enables those who’ve amassed considerable credit card debt to pay down their credit cards first. Since credit cards typically have a much higher interest rate (10-20%) than student loans (4-10%), borrowers may be able to save a significant amount on interest by paying extra on the credit card and initially paying less on student loans.
  4. A Higher Standard of Living: While paying off debt as soon as possible is a great first step towards a higher standard of living, the aggressiveness with which a person pursues that goal is a personal decision. Choosing a shorter term length can force borrowers to achieve that objective sooner rather than later, but not everyone is willing to sacrifice a certain standard of living. The lifestyle that a shorter or longer repayment term will require or allow is an important factor to consider.
  5. Achieve Other Financial Goals: While certain financial goals may not be able to be met as long as student loans are present, the extra money that a longer repayment term frees up may be used to invest in a for a child’s college education or to build up an emergency fund.

How to Decide on a Repayment Term

In general, it’s wise to choose the shortest repayment term that can be managed. However, borrowers should keep these principles in mind as they make this decision – they should select a term length that:

  • Allows for the prioritization of higher interest debt
  • Creates the ability to build an emergency fund so that the unexpected doesn’t force default
  • Requires careful budgeting and a certain amount of sacrifice – while it’s important for borrowers not to overreach and set themselves up for failure, some forced sacrifice is good since a lower standard of living now will allow set them up for future success

The Process of Consolidation

How to Consolidate Federal Student Loans

Before borrowers actually start the process of consolidating student loans, they should be aware of several things:

  • The Process Is Free: Borrowers shouldn’t pay for help with their student loans. There are federal loan consolidation services that offer to help consolidate federal student loans for a fee. Whether or not this is an outright scam (many times the money is kept and no service is actually provided), the same services that the company charges for can be obtained for free from the borrower’s .
  • Consolidation Is Final: A Direct Consolidation Loan actually pays off the loans being consolidated and the old loans disappear. Potential consolidators should be aware that the process is irreversible.
  • There’s Help for Those Who Need It: Anyone who has problems or questions during this process can call the Federal Student Aid’s Loan Consolidation Information Call Center at 1-800-557-7392. Additionally, the individual’s loan servicer may be able to provide help with this process.

Once research has been completed, and the decision to consolidate federal student loans with a Direct Consolidation Loan has been made, the actual process of consolidating is relatively simple. The following is a step-by-step guide to obtaining a Direct Consolidation Loan.

Step 1: Navigate to and Log in

This process requires borrowers to enter their FSA IDs. Those who have an FSA PIN and haven’t yet created an FSA ID will need to do that at this time. There is an option to create an FSA ID on the login page.

Step 2: Start the Application

The form that needs to be filed can be found by clicking the “Apply for Loan Consolidation” button on the home page. Those who want to apply online can simply click “Start,” while those who want to fill it out another way can find instructions for doing so on the same page.

Step 3: Choose Which Federal Student Loans to Consolidate

As was previously mentioned, those that have made progress towards loan forgiveness or cancellation may want to leave those loans out of the consolidation. Another factor that was discussed earlier is the wisdom of not consolidating higher interest loans and lower interest loans together.

Step 4: Decide Whether to Delay Processing

If any of their loans are currently in the grace period, borrowers may elect to have their servicer delay the processing of the loan consolidation for one to nine months to take full advantage of the grace period for the loan(s).

Step 5: Select a Loan Servicer

The Federal Government contracts private companies to service federal student loans. These companies are called “loan servicers.” Direct Consolidation Loans are managed by one of four servicers chosen by the borrower. The choices are: , , , and . If one of those servicers currently manages the borrower’s loans, the same servicer may be retained, or a different one may be chosen.

Step 6: Choose a Repayment Plan

Regardless of which repayment plans the previous loans were enrolled in, will need to be selected for the consolidation loan. There are seven repayment plans to choose from which fall into two categories: term-based or income-based. Under term-based plans, the payment is determined by the repayment term length (the plans are either equal payments or start lower and increase as time goes by).

Monthly payments on income-based plans are based on a percentage of the borrower’s income and qualify for loan forgiveness after a number of qualifying payments have been made (usually 20 years). If an income-based plan is chosen, financial information will need to be provided. This information can be submitted with the application by granting access to personal IRS tax information. Those who choose not to provide access at that time will need to submit a copy of their most recent federal tax return to their servicer before the loan consolidation can be finalized.

Step 7: Provide Personal Information and Submit the Application

At this point, basic personal information will need to be filled out. In addition, the names of two references who have known the applicant for at least three years will need to be provided. After the form is completed and double-checked for accuracy, it can be submitted.

What’s Next

It’s important to note that while the application is being processed, payments on the old loans will still need to be made as usual. Once the application has been processed, the loan servicer that was selected will the applicant with instructions for how and when to start making payments on the consolidation loan.

How to Choose a Private Consolidation Loan

The lender you choose is critical, and there are more aspects to consider than just the interest rate. Factors like fringe benefits and eligibility requirements are also important. The features that need to be researched when shopping for a private consolidation loan can be broken down into five categories.


The primary way to filter lenders is to determine if they offer consolidation loans to the individual who is shopping for the loan. For example, most lenders require a minimum credit score, and others only offer loans to those whose annual income meets a certain standard. The following are the most common eligibility requirements:

  • Credit Requirements: Is the shopper’s credit score and credit history compliant with the lender’s requirements (most lenders require a 650+ credit score)? Is his or her income-to-debt ratio low enough to be eligible? Can those with a shaky credit history utilize a cosigner (if one is available)?
  • Employment Stipulations: Does the borrower’s annual income meet or exceed the requirement (if any)? Does the lender require that the shopper be employed or employed in a certain industry?
  • Degree Requirements: If the lender only accepts graduates or those with a specific type of degree, does the shopper’s school and degree qualify?
  • Other Requirements: Is there a specific credit union that the shopper must be a member of? Are there location or state limitations?

Interest Rates

The most important factor to consider is the interest rate. Before actually getting rate quotes, lenders can be filtered by the range of interest rates that they offer. Once the interest rate ranges have been identified, rate quotes can be obtained on the lenders’ websites.

Note: Many lenders perform soft credit checks so that their initial rate quotes won’t damage the credit of the shopper. Borrowers should be careful during this process and pay attention to whether the site specifies that their credit score won’t be affected by getting a quote. In general, if a social security number is provided, a hard credit check will be recorded, and the credit score of the borrower could be negatively impacted.

Loan and Refinancing Terms

Most lenders have a minimum and maximum consolidation loan amount. For instance, a common minimum amount is $5,000, and a common maximum is $200,000. An even more important factor to consider is the minimum and maximum length of loan term that the lender offers. If a longer loan term is desired, shoppers should check whether the lender charges a higher interest rate for longer term lengths.

Repayment and Hardship Options

Some lenders offer benefits similar to those available with federal student loans like repayment plans, deferment, or forbearance. These fringe benefits can be very valuable and should be taken into consideration when choosing a lender.

Fees and Discounts

Origination fees are a significant expense that should be factored into this decision – not all lenders charge them, but a 1-2% fee can take a great loan and make it unattractive. There are other fees (such as late fees) that should also be researched. On the positive side, many lenders offer some discounts. For instance, a common discount is the autopay discount that is applied to loans that are automatically paid each monthly from a checking account. A typical autopay discount is 0.25%.

The Best Private Consolidation Loans

Rather than create a true ranking and assign each company a numerical value, we compared 16 top companies that were available to most people based on a set of criteria, and then identified those that are the best for specific types of borrowers. The companies we recommend are chosen because they specialize in providing loans for borrowers in key demographics.

The categories of borrowers that we identified are:

  • High-Income Borrowers: This category is for graduates with a secure financial future who want the lowest possible interest rates and hardship options.
  • Typical Graduates: This type of borrower is a graduate who wants flexible payment options and great fringe benefits.
  • Flexible Eligibility: Those in this group want to be evaluated on a wide variety of merits and need more flexible eligibility requirements.
  • Non-Graduates: Students who didn’t graduate fit into this category.

The following are our top picks for each category of borrower:

  • SoFi: Best for High-Income Borrowers
  • : Best for Typical Graduates
  • : Best for Flexible Eligibility
  • : Best for Non-Graduates

Our Methodology

Contender’s List

We started by gathering a list of private companies that consolidate and refinance student loans. That list included 37 lenders. Then we eliminated those that weren’t available to most U.S. residents so this ranking would be useful to as many people as possible – most of the eliminations were credit unions with regional location requirements.

After the cuts, we were left with 16 companies to compare:

  1. Citizens Bank
  2. College Ave
  3. CommonBond
  4. Connext
  5. Discover
  6. DRB
  7. Earnest
  8. EdvestinU
  9. iHelp Student Loans
  10. LendKey
  11. Mefa
  12. Navy Federal Credit Union
  13. Purefy
  14. RISLA
  15. SoFi
  16. U-fi


Our next step was painstakingly researching each company. The majority of data was taken directly from the companies’ websites. When information was not available, we ed representatives from the company for clarification.

We compiled research for the following data points:

Credit Requirements

  • What is the minimum and recommended credit score?
  • What are the borrowers’ average credit scores?
  • What is the maximum allowable debt to income ratio?
  • What kind of credit histories are recommended?
  • Is there a cosigner option for those with sub-par credit?

Employment Stipulations

  • What is the minimum required annual income?
  • What is the average income of borrowers?
  • Is employment verification required?

Student Eligibility

  • Is there a graduation requirement?
  • Are there limitations on what types of degrees or schools are eligible?
  • Are both private and federal loans accepted?
  • Are there location-based restrictions?

Interest Rates

  • What is the range of fixed rates that are offered?
  • What is the range of variable rates that are offered?
  • Is there a preapproval screening option with a soft credit check?

Loan and Refinancing Terms

  • What is the minimum loan amount?
  • What is the maximum loan amount?
  • What is the minimum loan period?
  • What is the maximum loan period?

Repayment and Hardship Options

  • Are there different repayment plans from which to choose?
  • Are there deferment options?
  • Are there forbearance options?

Fees & Discounts

  • Is there an origination fee?
  • Is there a prepayment fee? (No lender should be charging as these have been illegal since 2008)
  • What are the late fees?
  • Are there autopay discounts?
  • Are there other discounts?


We evaluated and scored each company based on the research we compiled. The companies with the following attributes scored the highest:

  • The lowest interest rate ranges
  • The widest range of loan terms to choose from
  • The least fees
  • The widest variety of repayment options
  • The best additional benefits

Overall, our evaluation identified a top company for each of the four categories that cover the various needs and financial situations of borrowers. We will also share the research we compiled about the other companies we reviewed.

Top Picks and Scoring

The following are the top companies we identified for each group of borrowers. Included is a breakdown of how each scored in our evaluation.

Note: Figures that pertain to interest rates were current as of March 2017, but since the market conditions are always changing, the actual interest rates offered by the lenders will change. The information that is provided below will serve as a comparison tool between lenders, but it is not a guarantee that specific interest rates are currently offered.

High-Income Borrowers: SoFi

SoFi is best for high-income graduates who want the lowest possible interest rates and a good selection of hardship options. SoFi beat out CommonBond for the top spot in this category because it offered a more robust selection of deferment options and has intriguing additional features (like a referral program that offers cash rewards when referred applicants are approved).

The following are SoFi’s best features and drawbacks:

  • Best Features: Of all the companies that required a minimum credit score, SoFi tied one other lender for the lowest required credit score. SoFi also provides unemployment protection – if the borrower becomes unemployed, forbearance (a period of time in which payments are not due, but interest is still charged) may be granted in three-month chunks.
  • Drawbacks: To be eligible, students must have graduated and must be employed or have an offer of employment that begins within 90 days. Another drawback is that Nevada residents are not accepted.

The table below details the research we compiled for SoFi:


Disclaimer: All rates, member figures, estimates, terms, state availability, and savings calculations are current at the time this article was written. All of the above may update in the future. For the most up-to-date information, visit Sofi.

Typical Graduates:

LendKey markets itself to graduates who are searching for the lowest interest rates but want flexible payment options and decent fringe benefits.

The following are LendKey’s best features and drawbacks:

  • Best Features: LendKey tied Purify for the best fixed interest rates (the lowest offered fixed rate is only 3.5%). LendKey also offers a unique repayment plan – borrowers can opt to make interest-only payments for up to four years. Another benefit is that a 1% interest rate reduction is available after 10% of the principal is paid off.
  • Drawbacks: Only graduates are eligible, and the minimum credit score is higher than others – a FICO credit score of 680 is required.

The table below details the research we compiled for LendKey:

Flexible Eligibility:

Earnest is best for non-traditional graduates who need flexible eligibility requirements and want to be evaluated on a wider variety of merits.

The following are Earnest’s best features and drawbacks:

  • Best Features: One of Earnest’s best features is its lack of a set minimum credit score, and the average credit score of its customers is lower than most other lenders (700 vs. 750+).
  • Drawbacks: A significant drawback is that residents of Alabama, Delaware, Kentucky, Mississippi, Nevada, and Rhode Island, aren’t eligible. Additionally, Earnest doesn’t offer variable rates to residents of Illinois, Minnesota, and Tennessee.

The table below details the research we compiled for Earnest:


Unlike the majority of lenders, Citizens Bank is available to those who didn’t graduate college.

The following are Citizens Bank’s best features and drawbacks:

  • Best Features: Citizens Bank offers the lowest variable rates (2.39%) out of all the lenders we researched. Another benefit is the 0.25 percentage point interest reduction for new customers who have a qualifying account with Citizens Bank.
  • Drawbacks: Compared to other lenders (many of whom don’t allow non-graduates), the lowest offered fixed interest rate is somewhat high (4.74%). The average credit score (781) of its customers is the highest we found.

The table below details the research we compiled for Citizens Bank:


Unlike the majority of lenders, Citizens Bank is available to those who didn’t graduate college.

The following are Citizens Bank’s best features and drawbacks:

  • Best Features: Citizens Bank offers the lowest variable rates (2.39%) out of all the lenders we researched. Another benefit is the 0.25 percentage point interest reduction for new customers who have a qualifying account with Citizens Bank.
  • Drawbacks: Compared to other lenders (many of whom don’t allow non-graduates), the lowest offered fixed interest rate is somewhat high (4.74%). The average credit score (781) of its customers is the highest we found.

The table below details the research we compiled for Citizens Bank:

Side-by-Side Comparison


Other Lenders to Consider

We also researched other lenders that were available to most US citizens. The following comparison table provides an overview of what we found out about the most important features.


*For loans below $100,000 the minimum annual income is $30,000; for loans above $100,000 the minimum annual income is $50,000

Take Action

While there’s definitely a lot to think about when it comes to consolidating student loans, borrowers who know their options can utilize consolidation loans when appropriate to simplify their bill payment procedures, and maybe even save a considerable sum of money. This guide provides a great starting point for those considering consolidation, but borrowers should conduct their own research as well. They shouldn’t stop there – once this process is completed, they can decide on a strategy to repay their student loans.