Federal Student Loan Consolidation: Pros and Cons

Federal Direct Consolidation Loans have advantages and disadvantages. If you’re considering consolidating your federal student loans, understand the pros and cons.

Whether you’re a recent graduate or have 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 an appropriate option to consider.

Consolidating your student loans is when you combine multiple debts into a single loan. With a federal Direct Consolidation Loan, you can consolidate all, some, or one of your federal student loans. By consolidating these loans, you might get access to repayment options and forgiveness programs, as well as perhaps lower monthly payments. Also, you only have to make one monthly payment instead of many different payments each month. Plus, consolidation is a good way to get out of default on your student loans.

But before you move forward with a Direct Consolidation Loan, consider both the advantages and disadvantages. On the positive side, discussed in more detail below, with a Direct Consolidation Loan, you:

  • might get lower monthly payments
  • get a fixed interest rate
  • make one payment per month
  • might get access to different repayment options
  • can get out of default
  • get access to the Public Service Loan Forgiveness (PSLF) program, and
  • might get access to other loan forgiveness options.

However, on the downside:

  • you might pay more interest
  • you won’t get a grace period
  • you won’t immediately see a credit score improvement if you were in default
  • previous payments don’t count toward forgiveness, and
  • you might lose some benefits.

What Is 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.

What Loans Qualify for Direct Consolidation?

The vast majority of federal student loans are eligible for consolidation, including subsidized and unsubsidized Stafford loans, Direct Loans, Federal Perkins Loans, Nursing Student Loans, and more. For a complete list, go to go to the U.S. Department of Education’s Federal Student Aid website. Borrowers with these kinds of loans are eligible to consolidate after they graduate, leave school, or drop below half-time enrollment.

Private student loans, though, don’t qualify for consolidation under the federal Direct Consolidation Loan program. Also, if you consolidate your federal student loans into a private loan—rather than a Direct Consolidation Loan—you'll lose important benefits.

What Is the Interest Rate on a Direct Consolidation Loan?

The interest rate is fixed for the life of the loan. The rate is calculated based on the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth of a percent. So, the interest rate on your new Direct Consolidation Loan might be higher or lower than the interest on your loans before consolidation.

What Does It Cost to Consolidate?

You don’t have to pay a fee to consolidate your federal student loans into a Direct Consolidation Loan.

What Is the Repayment Term on a Direct Consolidation Loan?

The repayment term on a Direct Consolidation Loan is up to 30 years and depends on the amount of the consolidation loan, your other student loan debts, and the repayment plan you pick. You start repaying the loan 60 days after the loan gets disbursed. 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.

Because the repayment term is extended up to 30 years, you might be able to lower your monthly payments through a Direct Consolidation Loan.

Are There Any Restrictions on Direct Consolidation Loans?

Private student loans can’t be included in a federal consolidation loan. Also, spouses can’t consolidate their loans into a single consolidation loan. (The law used to allow married borrowers to consolidate their loans into a single joint consolidation loan.) And, borrowers who are in default must meet certain requirements before they can consolidate.

Can I Reconsolidate My Loans?

The circumstances under which you can consolidate a loan or loans that have already been consolidated are limited.

Why It Might Be a Good Idea to Get a Direct Consolidation Loan

Consolidating your federal student loans into a Direct Consolidation Loan offers some potential advantages.

You Might Pay Less Each Month

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

The Interest Rate Is Fixed

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. Again, 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 Only One Payment Each Month

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

You Could Get Access to Different Repayment Options

By consolidating, you might get access to a repayment plan that wasn’t previously available to you. You can repay a Direct Consolidation Loan, in most cases, with:

  • 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)
  • the Revised Pay As You Earn Repayment Plan (REPAYE), or
  • an Income-Based Repayment (IBR) Plan.

You Can Get Out of Default With Consolidation

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 some requirements. You must make three consecutive monthly payments on the defaulted 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.

If you have a defaulted loan that’s currently being collected through a garnishment of your wages, or in accordance with a court order after a judgment, you can’t consolidate the loan unless the wage garnishment order is lifted or the judgment vacated.

You Can 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 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.

You Might Get Access to Other Loan Forgiveness Options

With a Direct Consolidation Loan, you'll get access to income-based repayment plans that provide loan forgiveness after you've been in repayment for 20 or 25 years

Why You Might Not Want to Get a Direct Consolidation Loan

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

You Might Be On the Hook for 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, because the rate is based on the average rate of your consolidated loans, the rate on a consolidation loan might be higher than it was on some of the loans before you consolidated. 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.

You Don’t Get a Grace Period

With a Direct Consolidation Loan, you don’t get 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.

You Won’t Get an Immediate Credit Score Boost 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. On the other hand, if you rehabilitate your federal student loans, the lender will remove the default from your credit history (though not your history of late payments).

Your Prior Payments Won’t Count Toward Loan Forgiveness

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

You Might Lose Some Benefits Associated With the Loans You’re Consolidating

By consolidating, you could lose other benefits, like reduced interest rates, principal rebates, repayment incentive programs, or loan cancellation benefits 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 only available from that program.

How to Apply for a Direct Consolidation Loan

Should you decide to proceed with a Direct Consolidation Loan, you can apply at StudentLoans.gov.

Getting Help

To learn more about Direct Consolidation Loans in general, go to the U.S. Department of Education’s Federal Student Aid website. If you need help weighing the pros and cons of consolidating your federal student loans, consider talking to a student loan lawyer or debt settlement lawyer who works in this area.

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