For college graduates with federal student loans, loan consolidation might seem like a great way to take control of your student loans and streamline your finances. The way it works is simple: rather than making multiple payments each month, you consolidate (or merge) your loans into a single loan. The interest rates will be averaged, so the consolidated loan will have a rate based on the rates of your current loans.

Because borrowers can often choose to extend their loan term through consolidation, it might also work to reduce monthly payments. This option is available for federal student loans through the federal government.

While consolidation might seem like an easy way to reduce the stress of multiple student loan payments and lower your monthly payments, it isn’t always the best choice for recent college graduates. Read on to learn more about federal student loan consolidation—and why it might be better to wait.

How to Consolidate With the Federal Government

The consolidation process is relatively straightforward. Borrowers with federal student loans can apply for a consolidation loan through the United States Department of Education at Borrowers will need their federal student aid identification in order to apply. The application process itself is free and should take just a few minutes.

Once you have logged into the system, you can choose your loans, as well as your loan servicer. Then choose a repayment plan. Finally, be sure to review the terms and conditions of the loans and sign your application electronically. Once your loan is submitted, your consolidation loan servicer will be in contact with you if it is approved.

Federal loan consolidation is different from private student loan refinancing in several key ways. Most importantly, only federal student loans can be consolidated through this process; private student loans can’t be included in a federal loan consolidation. In contrast, both private and federal student loans can be refinanced together. Consolidation also does not generally result in cost savings, whereas refinancing often does.

With refinancing, borrowers can often obtain a lower or fixed interest rate loan by applying for and obtaining better loan terms. With consolidation, borrowers are simply merging their existing federal student loans and obtaining an average of their current interest rates.

Federal loan consolidation does offer some advantages. For many borrowers, consolidation is about simplifying their finances. Most people with federal student loans have more than one loan, which means making multiple payments each month. Consolidating allows borrowers to make just one payment each month. Consolidation can also allow borrowers to lower their monthly payments by stretching out their repayment term to up to 25 years.

As a general rule, borrowers can only consolidate their federal student loans once. However, there are exceptions, such as if you have new federal loans to consolidate or if you want to get into the Public Service Loan Forgiveness program.

What Happens If You Default on a Private Student Loan?

Refinancing and Consolidating With a Private Lender

As an alternative to federal student loan consolidation, borrowers can refinance and consolidate their private and federal student loans together with a private lender. This requires applying for student loan refinancing, which is essentially applying for an entirely new loan. In this process, the lender will weigh the borrower’s creditworthiness when deciding whether to issue the loan. The interest rate and loan terms will be based on the borrower’s credit score.

As described above, refinancing with a private lender allows borrowers to obtain lower and/or fixed interest rates on their loans, which can often help them save thousands of dollars on their loans. This is a significant advantage over federal loan consolidation. However, when borrowers refinance their federal student loans with their private loans, they lose the protections of federal student loans. This includes income-based repayment options and other benefits.

Is It the Right Time to Consolidate?

The main drawbacks to federal loan consolidation are that it can increase the overall cost of your student loans by extending the repayment term, and it can bring up the total interest rate of your loans. By averaging out your interest rates across all of your loans, you won’t be able to target your higher-interest loans for repayment. This can make it harder for you to pay off your loans quickly.

If you have just graduated, consolidating right away can prevent you from attacking your student loans with an aggressive plan to pay them off quickly. It may also cost you more in the long run if your payment term is extended. If your interest rates vary considerably and you do not need to lower your monthly payments, it likely makes more sense to wait to consolidate.

Similarly, if you are fresh out of college, you should consider whether it’s best to wait to refinance your student loans. Once you have established a good credit score, you will be able to obtain a better interest rate—and get an even better deal on your refinanced loans.

Other Ways to Lower Your Student Loan Payments

If you are struggling to make your student loan payments each month, there are other options to lower your payments. This can include income-based repayment plans that cap your payment at a percentage of your monthly income. An income-driven repayment plan will reduce your payments based on how much you earn, while an income-contingent repayment plan will either be based on a percentage of your discretionary income or on a fixed payment plan.

While consolidation might not be the best plan for all borrowers immediately after graduation, it can be a useful tool for some to use strategically in the future.