5 signs you might want to consolidate your student loans, according to a financial planner

The decision to consolidate your student loans is different if you have public loans, private loans, or both.

With the current median student loan debt in the US hovering between $20,000 and $25,000, it makes sense to explore your options.

One option is consolidating your loans.

However, there’s a lot of confusion around student loan debt consolidation — especially around the differences between federal and private student loans. I spoke with L.J. Jones, a CPA, CFP®, and Certified Student Loan Professional with Developing Financial, on these differences and when it might be a good idea to consolidate your student loans.

Here are five signs you might want to consolidate:

1. You understand the difference between federal and private loans

Jones explains that one common misconception is that people think consolidation for federal loans and private loans are the same thing.

However, you can only consolidate your federal loans within the federal student loan system. Once you do, you’re moving them into a Direct Consolidation Loan. “You’re essentially issued a new federal student loan,” Jones says. “And this can have some benefits because you’re still eligible for student loan forgiveness and deferment. There are also some lenient terms that federal debt can give you versus private debt.”

Private debt, on the other hand, is typically done through a private student loan refinancing company. And while you can consolidate both your federal and private loans together through a private refinancing company, you can’t consolidate your private loans with your federal loans through the federal student loan system.

If you take your private loans and federal loans and combine them into a new private loan, those former federal loans can never go back into the federal system, Jones says. “So you’ll lose access to many perks, such as programs like income-driven repayment plans (IDR), public loan forgiveness, and some of those lenient borrowing terms.”

Federal student loan consolidation does have some major minuses you’ll want to be aware of, Jones says. For one, while you might be able to lower your monthly payment, you won’t save on interest fees if you go this route.

In fact, when you roll your federal loans into a single loan, it’s a fixed rate based on the weighted average of all the loans you’re consolidating. The average is then rounded up to the nearest ⅛ of a percentage point. So, your student loan’s interest rate will be slightly higher.

2. You aren’t on track for loan forgiveness

Another drawback? If you have credit going toward public service loan forgiveness (usually 10 years of payments working at a qualifying employer), then some of your loans will be forgiven. Or if you have income-driven repayment, usually 20 to 25 years of payments, you’re eligible to have all your loans forgiven.

But once you consolidate your federal loans, those years you’ve worked toward forgiveness will return to zero. “That could be very detrimental to someone, especially if they’re close to reaching forgiveness,” Jones says. “Borrowers need to be very careful when consolidating if they’re trying to go for public service on forgiveness or income-driven.”

3. You still have FFEL loans

So why might you consolidate your federal loans if you’re actually paying more in interest? One benefit is that borrowers with loans for 15-plus years had FFEL loans (short for Federal Family Education Loans). The loan program ended in 2010, but if you took out federal loans before that date, you still might have a FFEL loan.

These loans were actually the common ones before Direct Loans, Jones says. Now that everything is Direct Loans, there are certain repayment plans and programs where you must have Direct Loans to qualify.

So if you have those FFEL loans, you wouldn’t be eligible for current — and future — programs that will likely come out that need Direct Loans, Jones says. So, the only way to qualify for direct-loan eligible programs is to consolidate them into the federal program.

4. You can simplify payments or get a lower interest rate

Jones recommends consolidating private loans if you can accomplish one of three things. The first is to simplify your payments. “Sometimes people have multiple different lenders, so it would be really nice to consolidate into one payment,” Jones says.

The second potential benefit is that you might get a lower interest rate. “That makes a huge difference because now you can pay less [in interest] to pay off the same amount of loans you had,” Jones says.

Another potential benefit is switching from a variable interest rate to a fixed one. “When you know what your interest rate will be and that it’s not going to change based on market conditions, your payment will be the same,” Jones says. “That can be beneficial to give someone the confidence that this will be their payment for the next 5, 10, or 15 years.”

5. You have a high credit score

Jones also points out that some private lenders don’t charge fees to consolidate — and are even giving out bonuses for new customers. “The application can be very quick and works in your favor, especially if you’re getting a low interest rate,” he says. However, you usually need a high credit score to qualify for these student debt consolidation loans with no fees, bonuses, and lower rates.

It’s always a good idea to apply and get multiple refinancing or consolidation quotes. “If you go to one person, you’re locked into whatever they give you,” Jones says. “But if you go to a number of lenders, you can see what’s being offered. And the more knowledge you have, the better terms you can get.”