Morgan Stanley
  • Wealth Management
  • Jul 29, 2021

Consolidating Your Student Loans: What You Should Know

Student loan debt can be burdensome, and having to keep track of payments to multiple lenders can make things even more complicated. Could student loan consolidation or refinancing simplify your financial life?

Let’s face it—keeping track of balances and payments on multiple student loans each month can be a hassle. Even if you have every intention to make your payments diligently and on time, it can be easy to overlook a bill when you’re juggling several loans from different servicers.

Consolidating your federal loans with a Direct Consolidation Loan, or refinancing your private student loans, could make your life a bit easier. Here’s what you need to know before moving forward.

What is a Direct Consolidation Loan?

A Direct Consolidation Loan is a federally-backed student loan consolidation program that combines multiple federal loans into one in order to simplify repayment.1

Terms for Direct Consolidation Loans go up to 30 years, and the interest rate on the new loan is the weighted average of your current loans’ rates rounded to the nearest one-eighth of one percent. 

What Are the Benefits of Consolidation?

  • No fee: There is no fee to apply for a Direct Consolidation Loan.
  • Less hassle: Instead of managing multiple payments, you’ll only have to keep up with one until the loan is paid off.
  • Fixed interest: The consolidation could turn a variable interest rate into a fixed rate, which stays the same for the life of the loan, ultimately stabilizing your payments.
  • Benefits: Direct Consolidation Loans can qualify for forgiveness and income-based repayment programs, potentially opening doors to new relief and benefits.

How to Apply for a Direct Consolidation Loan

You can apply online at or submit a paper application. To complete the online form, you’ll need to know the loan-type codes, account numbers and the amounts of the loans you want to consolidate.

What to Think About Before Consolidating Your Loans

The Direct Consolidation Loan is designed for convenience and not necessarily savings. Extending your loan term with this type of loan can lower your monthly payment—but that doesn’t always translate into paying less in the long run.

Since the consolidation loan’s interest rate is an average of your current rates, you probably won’t see long-term interest savings unless you pay off the loan early. In fact, you could end up paying more over time with a longer loan term because you’ll be making more payments.

Moreover, consolidating with a new loan means you could cost you perks—such as interest rate discounts or rebates—that you have on your existing loans.2

Consolidation vs. Refinancing: What’s the Difference?

To this point, our discussion has been focused on the consolidation of federal student loans. But you may have loans from private lenders as well. While it’s sometimes called private loan consolidation, the process of combining and streamlining payments on private student loans is more accurately called refinancing.

Consolidation and refinancing help you do a similar thing—pay off multiple old loans with a single new one—but there are some key differences between the two options:

  • The issuer: A Direct Consolidation Loan is a federal student loan offered to consolidate federal student loans; meanwhile, refinancing is generally offered by private lenders and can incorporate both federal and private loans.3 Some states offer refinancing as well.4
  • The purpose: A Direct Consolidation Loan is meant to combine your loans for easier repayment. Refinancing can do this too, but its main purpose is to offer savings on interest rates.
  • The interest rate: Again, a Direct Consolidation Loan has an interest rate that’s the weighted average of your current loans. A refinanced loan might have a fixed or variable interest rate that’s lower than your current rate, which could lead to monthly and long-term savings.
  • The benefits: Since the Direct Consolidation Loan is a federal loan, it comes with some distinct advantages, such as forgiveness, forbearance, deferment and income-based repayment programs. Depending on the lender, refinanced loans from private lenders might come with some perks of their own, but generally do not have all of the same protections as federal loans. 

The Bottom Line

If you (and possibly a partner) have several loan payments to keep track of each month, consolidating or refinancing can reorganize your debt so that it’s easier to manage.

Whether consolidation or refinancing is the right choice for your debt depends on the types of loans you hold as well as your goals. If you have multiple federal loans and are looking to simplify and lower your monthly payments, you may be interested in consolidation. If you have private loans as well and are motivated by savings, refinancing may be worth exploring. Shop around and compare offers to decide if and which one of these options may fit your needs.