Should I Consolidate?

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.  In the past, consolidation would reset any progress you’d made towards forgiveness programs such as PSLF or the Income Driven Plans to zero.  That is no longer the case for PSLF.  Loans consolidated now will receive a weighted average of the counts on their underlying loans.  For borrowers who applied for consolidation by June 30th, 2024 the forgiveness count on the resulting consolidation was the highest count attributable to the underlying loans in the consolidation due to a temporary waiver called the one time account adjustment.  But if you consolidate after that date, any counts towards income driven plan forgiveness will reset to zero.

Any consolidation disbursed on or after July 1, 2026 will also remove your eligibility for all repayment plans other than the new RAP plan or the tiered standard plan.  Parent Plus loans, consolidated or not, can never get the RAP plan so would be restricted to the tiered standard, which is not PSLF or income driven plan forgiveness eligible.

When you consolidate, the counts will often initially reset to zero but will be restored under this weighted average calculation at a later date.  For PSLF the weighted average is only calculated for eligible payments made on Direct Loans.  For the IDR forgiveness the weighted average includes eligible payments made on both underlying Direct and FFEL program loans.

Example 1:

A borrower has $50K in loans that have a PSLF count of 60 and $50K in newer loans with no PSLF counts.  If they consolidate they will have a single consolidation loan with a PSLF count of 30.

Example 2:

A borrower has $50K in loans with an IDR count of 50 and $25K in loans with a count of 100.  If they consolidate the new consolidation will have an IDR count of 67

Here’s the math:

50x$50,000 = 2,500,500

100x$25,000 = 2,500,000

Total of both  = 5,000,500

Divided by the total debt ($75K) = 66.6733

[50 x $50,000 + 100 x $25,000] / $75,000)

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.

 

How to Consolidate Federal Student Loans

You can consolidate your federal student loans at www.studentaid.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.