Many people want to better manage their student loans and optimize how they repay them. There are a variety of ways to achieve this, but (as is the case throughout many aspects of the student loan world) understanding the confusing array of options can be challenging.

In my next several articles, I’m going to give you a crash course in student loan “consolidation,” “modification,” and “refinancing.” People often casually use these terms interchangeably, but they actually can mean very different things, and it’s important to understand their definitions.

Today’s post is about student loan consolidation. 

Student Loan Consolidation

Consolidation allows you to combine a bunch of individual student loans into a single new loan. Put another way, consolidation results in a new, large loan that pays off several smaller ones. The main benefit of consolidation is that it can simplify loan repayment by giving you a single student loan, a single loan servicer, and a single monthly payment. It can make your life a bit easier.

For federal student loans, there is a federal Direct consolidation loan program that allows you to consolidate your federal student loans, but only your federal student loans. The resulting Direct federal consolidation loan is essentially the sum of its parts, with no real change to the overall interest rate or the key terms and conditions. However, Direct loan consolidation can potentially open up a few new repayment plan options, depending on the types of federal loans that you are consolidating and your overall total loan balance, and it can also play a role in resolving delinquency and default. You cannot include your private student loans in a Direct federal consolidation loan, which is one of the big limitations of this program.

There are some private student loan consolidation programs, however. Many of these programs allow you to consolidate your private student loans and your federal student loans. These consolidation programs can significantly simplify repayment management if you have multiple student loans with multiple loan holders. However, I would caution people about including federal student loans in a private consolidation loan. Once a federal loan is rolled into a private consolidation loan, it ceases to be federal, and you consequently will lose out on all federal student loan program benefits (such as income-driven repayment, loan forgiveness, and generous federal deferment and forbearance programs). And since there’s no way to “un-consolidate” a student loan or include a private student loan in a federal Direct consolidation, it’s a one-way street out of the federal student loan system. So be careful.

Stay tuned. Next week I’ll talk about student loan modification, which is something entirely different.