The Golden Rule of Student Loan Consolidation

Michael Lux Blog, Consolidation, Student Loans 16 Comments

If you are considering consolidating your student loans,there are many things to consider.  However, one rule is more important than all the others: Don’t consolidate your federal student loans with your private student loans.  This terrible idea should be avoided by nearly everyone.


In order to understand why combining your federal government loans with your private loans is such a bad idea, you first need to understand the differences between these two types of loans.

Federal Loans

These are the Loans that you get from the government after you complete your FAFSA.  These loans are special because they come with special right guaranteed by law.

These special rights include:
Repayment plans based upon income
– Deferment period for unemployment
Student loan forgiveness programs
– many other protections in the event of your permanent injury or death

Private Loans

The terms of these loans vary greatly from one lender to the next.  One thing that these loans all have in common is that they are nearly impossible to discharge in bankruptcy.

Further Reading: The Sherpa Guide to Private Loan Consolidation

What’s wrong with combining/consolidating these loans?

When you combine your federal loans with your private loans, the new loan ceases to be a federal loan and all the advantages you had with your federal loan are gone.  That means if you get sick or lose your job and find yourself in a difficult financial situation, you are stuck with the harsher terms of your private loan.

If you mistakenly combine loans you could cost yourself thousands in student loan forgiveness.  If the government comes out with a new program that could help you, you will miss out if you combined your loans.

The exception to the rule:

They say there is an exception to every rule and the Golden Rule of Student Loan Consolidation is no different.  If you are 100% certain that you know exactly how much money you will be getting and when you will be getting your money, this exception may work for you.  This exception applies only to the people who care about interest rate and nothing more.

An Example

Let’s say you won the lottery and will be getting $10,000 a month for life.  Even if you don’t have the money today, there is no doubt that you will have the money and you will be able to pay it off.  In that case a private consolidation may help you lower your interest rates an you may be better.

The moral of the story

If there is even the slightest bit of uncertainty in your financial future, you shouldn’t combine your private student loans with your federal student loans.  Follow the Golden Rule of Student Loan Consolidation and you could save yourself thousands.

  • I’m fortunate because I don’t have student loans. I have been getting through school without any because of savings from before college as well as working a lot.

  • Barb Friedberg

    I was fortunate to go to a low cost public university and got out without loans. But this is very timely info for those with student loans.

    • Thanks Barb! Its a little piece of advice that I often find myself giving and then having to explain, so I figured it was time to write out an article and lay out all the facts.

  • squirrelers

    With education costs what they are, and loan balances ridiculously high for many people, they need all the tips they can get. Great info.

  • Peter

    Thanks for the great tip Michael, so consolidation is not always good. Got it.

  • Jkim

    Thanks for your work Sherpa. What do you think about SoFi which proposes to consolidate fed and private loans. In light of the Golden Rule of Student Loan Consolidation, is it a bad idea to refinance through an organization like SoFi? My current interest rate with both fed and private is fairly high, averaging about 7.0, and the amount of the loan is high as well. I’m looking for ways to ease the situation but it’s just so difficult.

    • I get why you would want to do it, but I’d exercise caution. The benefits of federal loans, such as Income Based Repayment and loan forgiveness opportunities are unmatched in the private sector. Even if they might not help you now, its probably best to keep your fed loans as fed loans if there is even a possibility that you might use these perks.

      I’d say definitely consolidate your private loans to get the best rate, but think long an hard about giving away the federal perks for a slightly lower interest rate.

    • Will Wallace

      Can you speak about where the line is regarding “slightly lower rate?” My wife has about $75,000 of law school loans at 7.5%. We’re currently on income-based repayment…on a few of these, we haven’t even made any progress on principal despite four years of payments. Would pursuing a 3.65% fixed rate be worth it (our credit is solid)?

    • Assuming that you are paying off the loan in 15 years (just for the sake of the math), you will pay about $695 a month if your interest rate is 7.5% but at 3.65%, your payment would be about $541. In my mind that is a pretty big difference, but you do give a lot in terms of federal benefits.

      The best way to look at it would be to view the extra money spent on interest as an insurance policy. If you think the extra money spent is worth it to keep the federal programs there as backup, I wouldn’t consolidate. If you don’t want to pay the extra money to have the federal perks, then consolidating is a good idea.

    • Gina

      Hi, May I ask where you were able to get a fixed rate at 3.65%? I’m looking to consolidate and would love that. The fixed rates I’ve been seeing on an aggressive repayment (5 year repayment term) have been around 4.5, but on a 10 year repayment they’re 5% and higher. Is yours on a short repayment plan and who is the lender? Much appreciated.

  • RC

    Maybe not having to deal with Sallie Mae, is worth breaking the “Golden Rule”?

    • Haha RC, it is hard to argue your logic there. However, I have heard rumors about the federal government letting students pick their loan servicers… in that case it wouldn’t be necessary.


    Thanks for the comments, but it’s a bit disingenuous to use the example of a lottery ticket winner as the example scenario of a time where it “may” make sense. For example, as Will Wallace mentioned in your comment trail, a savings of almost 4% on a loan may outweigh the Federal “perks” you describe that are almost entirely based upon distressed financial situations. Those “perks” cost money. In the case of someone with $100,000 in loans, a 4% change in interest rate is $4,000 per year. If that money were to be put into a savings account, it would cover as much as 6 months of payments. Even disability and unemployment insurance could be purchased using the $4,000 in savings to cover that gap. Your focus on the “perks” over actual savings is misleading. I appreciate noting the difference, but for many, prudent planning and cost savings outweigh the risk of getting a forbearance in the unlikely scenario it’s needed.

    • You make a fair point, using winning the lottery as an example is probably a bit extreme. I’ve previously covered the math goes into the decision here:

      The critical point behind this article is that consolidating federal loans into a private loan can be a huge mistake, but your argument is well articulated. I’ll give some thought to incorporating some of the interest rate analysis into this article.

  • Michelle Hall

    This is great! I didn’t think about the long term effects of consolidating my federal loans. Thanks for the perspective.