Back in the early 2000’s, consolidation of student loans was a very common practice. The reason for this, especially for federal student loans, is that the loans at that time had variable interest rates. By consolidating when the rates were low, borrowers could lock in that lower interest rate. Starting in 2006, new federal student loans came with fixed interest rates, making consolidation not as valuable an option. Consolidation can still be useful, but must be considered carefully.
If you are interested in private loan consolidation, click here to skip down.
Pros of Consolidating Your Federal Student Loans
If you do have older federal student loans with a variable interest rate, and the current rates are low, consolidation may still be a good option for you. The interest rates on a consolidation loan are the weighted average of the rates of the underlying loans rounded up to the nearest 1/8 of a per cent. If you have fixed rate loans, consolidation will not help you interest rate wise. In fact, you end up with a slightly higher rate as explained above.
Consolidation can put all of your federal student loans in one place. These days, the Department of Education does a pretty good job ensuring that all of a borrowers student loans are handled by one servicer already, so for most people, there isn’t a need to do this. Payment options including automatic payments also make managing loans are multiple places easier.
There are some situations however, where consolidation is a very good idea. If you have Federal Family Education Loan program, or Perkins loans, consolidation can help make those loans eligible for Public Service Loan Forgiveness. If you have Parent Plus loans, consolidation will make those loans eligible for the income contingent repayment plan. Consolidation is also one way of getting your federal loans out of default.
Consolidation can also lower your monthly payments by extending the term of the loan. This can be useful if your income does not make the income driven plans affordable for you. You can find out what your payment will be under consolidation and the other repayment plans by using this calculator we like.
Drawbacks of Consolidating Your Federal Student Loans
Consolidation pays off your underlying loans and creates one new loan. This means that any progress you have made towards forgiveness under an income driven repayment plan or Public Service Loan Forgiveness does not carry over to the new consolidation loan. You will start at zero payments made for the purposes of those forgiveness programs.
Consolidation can make you ineligible for certain benefits your underlying loans are qualified for. Perkins loan cancellation eligibility is lost by consolidating these loans. Access to the income sensitive repayment option under the Federal Family Education Loan program is also lost by consolidating these loans into the Direct Loan program.
As previously stated, consolidation calculates the interest rate by taking the weighted average of the underlying loans and rounding up to the nearest 1/8 of a per cent. This means that consolidation can cost you more due to this slightly higher overall interest rate.
Consolidation can also cost you more by extending the term of the loan. The longer you take to repay the loan in full, the more you will pay in interest.
One last warning about consolidation. Many borrowers consolidate their loans and pursue Public Service Loan Forgiveness, which is not necessary if you already have federal Direct Loans. The standard repayment plan that you are placed on if you don’t choose something else is often mistakenly assumed to be an eligible plan for Public Service Loan Forgiveness purposes. Only payments made under an income driven repayment plan, or a ten year standard plan count for PSLF purposes. You can read the full eligibility rules for PSLF here.
In the past, consolidation would also reset your PSLF and Income Driven Plan forgiveness count to zero. Currently, as long as you submit your consolidation application by May 1st you will still get credit for past IDR and PSLF eligible payments once the ED processes the one time IDR adjustment (see our repayment page for more information on that program). In fact the new consolidation loan will receive the highest count of the underlying loans.
Consolidation applications received on or after July 1st, 2023 will receive a weighted average of the underlying loan eligible PSLF and IDR payment counts.
How to Consolidate Federal Student Loans
You can consolidate your federal student loans at www.studentloans.gov. There is no fee to do this. On the application, you can choose to consolidate all loans, or fill in the loans you do not want to consolidate on the “Do Not Consolidate” page. You will also be prompted to choose a repayment plan and will have the option to choose which loan servicer if you have a preference.
The process generally takes up to 60 days. You are required to continue to make your payments during this process.
The following loans are eligible for federal Direct Loan consolidation. With some exceptions, you may only consolidate once.
- Federal Family Education Loan Program Subsidized Federal Stafford Loans
- Federal Family Education Loan Program Unsubsidized Federal Stafford Loans
- Graduate and Parent PLUS loans from the Federal Family Education Loan (FFEL) Program
- Supplemental Loans for Students
- Federal Perkins Loans
- Nursing Student Loans
- Nurse Faculty Loans
- Health Education Assistance Loans
- Health Professions Student Loans
- Loans for Disadvantaged Students
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct PLUS Loans
In general, you can only consolidate your loans once. Exceptions to this rule include:
- Consolidating a delinquent loan
- To gain access to a benefit your current loan is not eligible for, such as Public Service Loan Forgiveness or income contingent repayment
- Consolidating a Federal Family Education Loan program consolidation to gain access to the no-interest benefit for active duty service members.
Private, state, institutional and other education loans are never eligible for federal consolidation. You also may only consolidate loans that are under your own name.
The term of your Direct Loan consolidation will be as follows:
|Total federal loan balance being consolidated||Direct consolidation loan repayment terms|
|Less than $7,500||10 years|
|$7,500 to $9,999||12 years|
|$10,000 to $19,999||15 years|
|$20,000 to $39,999||20 years|
|$40,000 to $59,999||25 years|
|$60,000 or more||30 years|
There is no pre-payment penalty for paying these, or any other federal loans, off early.
Defaulted federal student loans may be ineligible for consolidation if they are currently under a wage garnishment or judgment order. If they can be consolidated, you may be required to make several on time payments before the loans are released for consolidation. You may also be required to utilize an income driven repayment plan if you consolidate a defaulted loan.
Double Consolidation Method for Parent Plus Borrowers
Parent PLUS loans are not eligible for any of the income-driven repayment (IDR) plans in and of themselves. You can, however, consolidate the Parent PLUS loans to a Direct Consolidation Loan at which point the borrower gains access to one of the IDR plans, but only one – the income contingent repayment plan (ICR). Unfortunately, the ICR plan can often have a higher payment than the other IDR plans.
There is a loophole that enables Parent Plus loans to be eligible for one or more of the other and often lower cost income-driven plans. At TISLA, we call this the “super-secret double consolidation method.” It can be a little confusing, so bear with us as we explain it below.
Think of consolidation as a semi-transparent screen. If you put one screen over the Parent Plus loan you can still see it, but if you put two over it you can’t. It actually takes three consolidations for the process to be complete and it takes having at least two separate federal student loans. For the example below we are assuming the borrower only has Parent Plus loans.
Step 1: Divide your Parent Plus Loans into two groups: A and B. Each group must have at least one loan, but other than that it doesn’t matter how you split them up. Consolidate the loans in Group A into a Direct Consolidation Loan. Do this using the application online.
To get access to the online application, login to your account on www.studentaid.gov and click on Manage My Loans, and then click on Consolidate. You must list the loans you want to consolidate first and then you will be asked to list the loans you don’t want to consolidate in another section of the form. You must include the loan numbers for all the loans.
Print off a copy of the application so you will have a record of how you completed the application. Also, you’ll need the loan numbers for the loans you are not consolidating on this application for the next consolidation application that you will be doing on paper.
You’ll be asked to pick a loan servicer. Be sure to note which one you picked because you’ll need to pick a different one for the next consolidation. It doesn’t matter which payment plan you pick, because the loans won’t go into repayment until the third consolidation is done.
Step 2: Consolidate the loans in Group B to a Direct Consolidation Loan using a paper application: https://studentaid.gov/app-static/images/ApplicationAndPromissoryNote.pdf
The loans in Group B should be listed as the loans you want to consolidate and the loans in Group A should be listed as loans you do not want to include in the consolidation. For loan servicer, you must pick a servicer other than the one you are using for the other consolidation. There is a list of servicers below. It doesn’t matter which payment plan you pick, because the loans won’t go into repayment again until after step 3.
Step 3: Wait until you can confirm on the www.studentaid.gov website that both consolidations have been completed and loaded into the system. When both consolidation loans are showing on your account, start the third consolidation and consolidate the two consolidation loans using the online application. You can pick any servicer, but if you are seeking PSLF, pick MOHELA, the PSLF servicer. This time you can pick any IDR plan you are eligible for.
There are eligibility requirements for each IDR plan so be sure you know which ones you will be eligible for before you bother to do this process. We have details on all the IDR plans here: https://freestudentloanadvice.org/repayment-plan/federal-loan-repayment/federal-direct-loan-repayment-options/
In this example the borrower has a consolidation loan already, either FFEL or Direct Loan as well as at least one Parent Plus loan that is not consolidated. In this scenario you would first consolidate the Parent Plus loans with the online application. Once that is complete and the new consolidation is created and funded, you would use the paper application to consolidate the new consolidation with the older one.
In this scenario the borrower has both Parent Plus loans and other federal loans such as Stafford or Graduate Plus loans. Here the borrower would consolidate the Parent Plus loans with the online application. Once completed and funded, the borrower would use the paper application to consolidate the new consolidation with their other loans.
LOAN SERVICERS YOU CAN USE:
Note that it doesn’t matter which servicer you choose in most cases. You should choose a different servicer for each step if you are pursuing the double consolidation loophole. If you are pursuing PSLF you should choose MOHELA for the final step.
PO Box 82658
Lincoln, NE 68501-2658 USA
Attn: ED Loan Consolidation
PO BOX 300005
Greenville, TX 75403-3005 USA
PO BOX 300008
Greenville, TX 75403-3008 USA
PO BOX 300006
Greenville, TX 75403-3006 USA
Private Loan Consolidation
Private loan consolidation is a very different animal than federal loan consolidation in that it is more of a traditional refinancing option that borrowers with good credit can use to obtain a lower interest rate and/or longer term and lower payments. Private loan consolidation can also be a way of having your co-signer removed from responsibility for the loans.
You should only attempt private loan consolidation if your credit, including your debt to income ratio, will garner you a lower interest rate or other more beneficial term. Private loan consolidators can be picky in who they choose to accept for consolidation. Those companies with more lenient credit criteria tend to have higher interest rates.
While you can consolidate federal student loans into a private consolidation, we almost always recommend against this. Doing so means losing access to all federal benefits, discharges, repayment options and other protections. You should only consolidate your federal loans into a private loan consolidation if you have an extremely robust emergency fund, steady employment, and a very affordable payment.
TISLA has a policy not to recommend or dissuade consumers from one company over another. In the interest of assisting you in your student loans however, we are providing a list, in alphabetical order, of all the private loan lenders we know of that offer consolidation. If you know of others, please let us know. Note if the interest rate section states “not listed” the lender requires users to fill out personal information to obtain possible rates.
In School Repayment Private Loan Lenders