Federal Student Loan Consolidation: Pros and Cons

If you are considering consolidating your federal student loans, understand the advantages and disadvantages.

Whether you’re a recent graduate or you’ve been out of school for a while, you might be struggling to keep up with your federal student loan payments. You might even be in default on your student loans. Or perhaps you're having trouble keeping track of all of your loans. If any of these situations sounds like what’s happening to you, a federal Direct Consolidation Loan might be a good option to consider.

With a Direct Consolidation Loan, you combine one or more federal student loans into a new loan. By consolidating your loans, you might end up paying less each month, get out of default, and only have to make one monthly payment instead of many different payments each month. But before you move forward with a Direct Consolidation Loan, consider both the advantages and disadvantages.

What’s a Federal Direct Consolidation Loan?

Under the federal Direct Consolidation Loan program, you may consolidate (combine) one or more of your federal student loans into a new loan. The new loan will have a fixed interest rate based on the average of the interest rates on the loans being consolidated.

Almost all federal student loans are eligible for consolidation, and there’s no fee to consolidate.

Advantages to Consolidation

Consolidating your federal student loans offers some potential advantages.

You might lower your monthly payments. Consolidating your loans could lead to lower monthly payments because the repayment term is extended up to 30 years.

You’ll get a fixed interest rate. Direct Consolidation Loans have a fixed interest rate. Since July 1, 2006, all federal student loans have a fixed interest rate. But if you have federal loans, except Perkins Loans, that were disbursed before this date, you might have a variable interest rate on one or more of your loans. If the variable rate loans that you’re consolidating currently have low rates, you can lock in a fixed low rate by consolidating. This is because the new interest rate is determined based on the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth of a percent.

You’ll make one payment per month. After your loans are consolidated, you’ll only have to make one payment each month, rather multiple payments on various loans. For many people, it’s then easier to keep track of their student loan balance.

You might get access to different repayment options. By consolidating, you might get access to a repayment that wasn’t previously available to you. You can repay a consolidation loan under, for example, a standard repayment plan, a graduated repayment plan, an extended repayment plan, the Income-Contingent Repayment (ICR) Plan, the Pay As You Earn Repayment Plan (PAYE), Revised Pay As You Earn Repayment Plan (REPAYE), or an Income-Based Repayment (IBR) Plan, in most cases. (Learn about federal Student Loan Repayment Plans.)

You can get out of default. If you’re in default on some or all of you’re the loans you want to consolidate, you may include them in the consolidation loan, but you’ll have to meet certain requirements. Specifically, you must make three consecutive monthly payments on the loan first or agree to repay your new Direct Consolidation Loan under IBR, PAYE, REPAYE, or ICR. Loans come out of default status once they’re consolidated. (Learn what happens if you default on your student loan, including possible tax refund and social security intercepts.)

You might get access to the Public Service Loan Forgiveness (PSLF) program. Consolidated loans are eligible for the PSLF program. So, federal loans originated under the FFEL program or the Perkins loan program can be consolidated into a new Direct Consolidation Loan in order to qualify for PSLF. Otherwise these kinds of loans aren’t eligible for the PSLF program. But including a Perkins Loan in a consolidation will cause the loss of other specific cancellation benefits only available for that program. (Also, be aware that the PSLF may change or end, likely for new borrowers starting in 2019, under the Republican’s proposed PROSPER Act.)

You might get access to loan forgiveness options. Direct Consolidation Loans have certain forgiveness options. For example, if you make 25 years of qualifying monthly payments on an IBR (if you're not a new borrower on or after July 1, 2014) or ICR Plan, or 20 years for the PAYE Plan (or for new borrowers on or after July 1, 2014 under the IBR plan), the rest of the loan is forgiven. Forgiveness is also available under the REPAYE plan after 20 or 25 years depending on if the loans you're repaying were for undergraduate or graduate/professional study. (Forgiveness options, though, might also change under the GOP plan.)

Disadvantages to Consolidation

The following are a few potential downsides to consolidating your federal student loans under the Direct Consolidation Loan program.

You might pay more interest. Again, consolidation will extend the repayment period—perhaps to 30 years—which lowers the monthly payment. But you’ll pay more interest over the life of your loan. If you’ve just about paid off your student loans, it might not be worthwhile to consolidate. Also, the interest rate on the consolidation loan might be higher than it was on some of the loans you consolidated because the rate is based on the average rate of your consolidated loans. So, if you have one or more loans with significantly higher interest rates, it might make sense not to consolidate those loans and instead focus on trying to pay them off more quickly.

No grace period. With a Direct Consolidation Loan, there isn’t a grace period. The repayment period starts immediately upon consolidation and the first payment will be due in around 60 days. (Though, if any of the loans you want to consolidate are still in the grace period, you can delay the processing of a Direct Consolidation Loan until the end of a grace period if you make this selection in the application.)

No immediate credit score benefit if you were in default. If you were in default, your report will reflect that your previous loans were in default, but are now paid in full through the new loan. So, consolidating your loans won’t immediately help your credit. But if your payments are affordable after you consolidate and you continue to make on-time payments, your credit score will begin to improve.

Previous payments don’t count towards forgiveness. You don't get to count any payments that you made on a loan before you consolidated it towards the requirements for loan forgiveness.

You might lose certain benefits. By consolidating, you could lose other benefits, like reduced interest rates or repayment incentive programs that are available under the loans that you’re consolidating. Again, if you include a Perkins Loan in the consolidation, you’ll lose certain cancellation benefits that are only available from that program.

Special consideration for military servicemembers. If you’re an active-duty military servicemember, you’re eligible for an interest rate reduction to 6% under the Servicemembers Civil Relief Act for all federal (and private) student loans you took out before service if your military service materially affects your ability to pay the loan at the pre-service interest rate. But if you consolidate your loans while you’re serving in the military, you won’t be eligible to receive this reduction.

Getting Help

If you need help weighing the pros and cons of consolidating your federal student loans, consider talking to a student loan lawyer.

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