Should I consolidate federal student loans into a private consolidation loan?

Learn why it's rarely a good idea to consolidate federal student loans into a private consolidation loan.

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Be very cautious about consolidating a federal student loan into a private consolidation loan. Federal student loans have many more repayment options than do private loans. Once a federal loan is converted into a private loan, those options are gone forever. If you lose your job or your income changes, you will no longer be able to take advantage of federal income-based repayment plans.

Federal v. Private Student Loans

There are some important differences between federal student loans and private student loans.

Federal Student Loans

Federal student loans are either guaranteed or issued by the federal Department of Education (as of June 30, 2010 the federal government no longer guarantees loans, it only issues them). Federal loans go by many names: Stafford loans, Direct loans, PLUS loans, Perkins loans, and others.

As of 2006, all federal student loans have fixed interest rates. And most federal student loans are eligible for generous repayment plans based on your income. With federal loans, you are also eligible for forbearance and deferment if you run into financial difficulty (these programs allow you to temporarily stop making payments). (Learn more about federal student loan repayment options.) In addition, people who work in certain occupations—teachers, police officers, child care workers, certain health professionals—may be eligible for special loan cancellation and discharge programs.

Private Student Loans

Private student loans are issued by private banks. Your agreement with the bank controls the terms of the loan. Private loans can have variable or fixed interest rates. Variable interest rates require extra caution: a lender may offer a very low initial interest rate to entice borrowers, but the rate will likely rise through the life of the loan. Most private student loans do not offer income-based repayment plans, forbearance, deferment, or cancellation for people in certain occupations

To determine whether your loans are federal or private, look up your loans in the National Student Loan Data System.

Disadvantages of Private Student Loan Consolidation

Consolidation of student loans is a lot like refinancing a home loan: all debt is combined into a single loan, often with a single fixed interest rate. Banks often encourage consolidation by promising “one low easy payment.” Consolidation does simplify repayment if you can combine several different loans into one loan.

However, consolidating federal loans into a private loan is rarely a good idea. Here's why:

  • It is extremeley unlikely that a private consolidation loan will have better terms than your federal student loans.
  • In past years, federal student loans had variable interest rates, and a private consolidation loan could lock in a fixed rate. But since 2006 all federal student loans have a fixed interest rate, so there is no added benefit in getting a fixed rate with a private consolidation loan.
  • Converting federal student loans into private consolidation loans means all federal repayment options, forbearance, deferment, and cancellation are lost forever.

Consider a Federal Consolidation Loan Instead

Luckily, the advantages of consolidating—a single loan with a single payment—are available with a federal consolidation loan. Important things to consider before consolidating into a federal consolidation loan are:

  • Does the new loan have a longer term for repayment? If it does, this stretches out the life of the loan and means you will end up paying more interest on your loan.
  • Do any of the loans you are consolidating have special borrower benefits, such as interest rate discounts or principal rebates? A consolidation specialist should be able to tell you if any of your loans have these benefits. Some special borrower benefits are lost if you fold the loan into a federal consolidation loan.

The Department of Education has a calculator, available at loanconsolidation.ed.gov/loancalc/ to help you estimate your monthly payments with a federal consolidation loan.

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