Guide to Consolidating Federal Student Loans

Most students don’t take out a single student loan to pay for four years of college. Depending on your circumstances, you may take out both federal and private loans each academic year. If you choose to attend graduate school, you may take out additional student loans. By the time repayment begins, you will likely need to juggle multiple loan payments each month. These loans may have different grace periods and different interest rates. 

Of course, no one wants to start post-college life making 4 or 6 or more loan payments every month and juggling due dates. Consolidating federal student loans streamlines the repayment process and may save you money. Here’s what you need to know to make informed decisions about consolidation. 

Consolidating Federal Student Loans

Consolidation combines two or more loans into a single loan. This simplifies repayment and may lower monthly payments. But, consolidation also usually stretches out loan repayment terms, meaning that you’ll pay more over time. 

Many types of federal student loans can be consolidated. Some of the most common include: 

• Direct Loans (subsidized or unsubsidized)

• Direct PLUS Loans

• Federal Stafford Loans (subsidized or unsubsidized)

• Federal Perkins Loans

• PLUS Loans under the FFEL Program

Not all student loans are eligible for consolidation. And, consolidation can impact some of your rights as a student loan borrower. So, it’s important to do your homework before deciding to consolidate. 

Benefits of Federal Student Loan Consolidation

Consolidating federal student loans can simplify management of your loans. That’s especially true if you have more than one loan servicer. You’ll shift from multiple monthly payments to a single payment. You may go from separate payments on separate due dates to a single due date each month. And, you’ll be dealing with a single servicer.

Working with a single servicer can be especially helpful if you ever need to: 

• Request a deferment because you’re going back to school

• Shift to an income-driven repayment plan

• Enroll in a student loan forgiveness program

• Request a forbearance if you’re having financial problems

With multiple loans and more than one servicer, these processes are much more complicated. You may have to make several requests or fill out several applications. And, you may get different answers from different servicers. So, you could get relief from one servicer but still end up making payments with unfavorable terms on one or more of your other student loans.

Consolidation also allows extension of time to repay, which can lower your monthly payments. And, you may gain access to options like income-driven repayment plans and Public Service Loan Forgiveness (PSLF) when you consolidate loans other than Direct Loans. Note, though, that not all consolidated Direct Loan payments count as qualifying payments for PSLF purposes. Make sure you choose a repayment structure that will give you credit for all of your loan payments. 

Potential Drawbacks of Student Loan Consolidation

For most student loan borrowers, the main downside to consolidating student loan debt is the possibility that you’ll be making payments for much longer than you would otherwise. Though monthly payments will be lower, the total cost of your loan may be higher in the long run. The borrower has some control over this issue, though. If you can afford to make larger payments, you’re free to do so. That way, you can shorten the repayment period and lower the total amount of interest paid.

The greater concern for some borrowers is the possible loss of options. It’s important to make sure you understand how each specific loan will be impacted by consolidation. For example, Perkins Loan borrowers may be eligible for loan cancellation under certain circumstances. But, that eligibility is lost if the Perkins Loan is consolidated into a Direct Loan.

When You Should Consolidate Your Federal Student Loans

It’s common to consolidate loans shortly after leaving school but before repayment begins. To consolidate, your loans must be either in the grace period or repayment. The grace period will vary depending on the terms of the loan, but will typically begin when you leave school or drop below part-time hours. The grace period for most federal student loans is six months. 

You can consolidate eligible loans only once. But, you may be able to consolidate again if you take out additional eligible loans. Imagine, for example, that you consolidate your loans when you graduate from college. After a few years of repayment, you return to school for a graduate degree. You may be able to consolidate your existing consolidation loan with the new loans you took out for graduate school. 

Timing is especially important if you are working toward a PSLF. Loan forgiveness under PSLF requires 10 years of qualifying payments before the remaining loan balance is forgiven. Direct Consolidation Loans are eligible for PSLF. But, if you’re already making qualifying payments, consolidation will cut off that process. You’ll lose credit for any qualifying payments you made on your old student loans and have to begin the 10-year repayment period again. Depending on where in the process you are, that reset could be very expensive and could delay loan forgiveness for years.

The bottom line is that timing counts. It’s important to gather information and carefully consider your options before committing to a plan of action.

The Differences Between Student Loan Consolidation and Refinancing

On the surface, consolidation and refinancing look a lot alike. Both opportunities allow you to combine multiple loans into one loan. Both can result in one monthly payment, one interest rate, and one servicer. Both may offer the option of extending the loan term. But, there are very important differences. Be cautious when evaluating your options. You may see private student loan refinancing advertised as “private loan consolidation.” 

When you consolidate federal loans, you keep access to many options, protections, and programs that are specific to federal student loans. For example: 

• The right to request a deferment or forbearance if you are having trouble making payments

• Access to income-driven repayment options

• Eligibility for certain loan forgiveness programs

Refinancing involves a private lender. First, you must be approved for a new loan. The lender will check your credit report and verify your income. Depending on your credit score, your income, and other factors, the lender will decide whether you are a good risk. 

If your credit is bad or you have little or no credit history, the lender may deny your application. Or, they may require a co-signer. A co-signer is another person with more established credit who takes on joint responsibility for repayment of the loan. If you can’t make your loan payments, your co-signer will be responsible for repayment, just like you are. Their credit will be affected, and the lender may even sue the co-signer to collect on the loan. 

When you consolidate federal student loans, there is no application or loan origination fee. The interest rate on the new loan will be the weighted average of your current loans. Variables, like your credit score, won’t impact the interest rate. With a private lender, fees and interest will depend on many factors such as: 

• The lender

• Your credit history

• The loan amount

• The repayment term

Federal student debt consolidation loans always carry a fixed interest rate. With a private lender, you’ll have to shop for the best rate structure available.

The most significant difference is that when you refinance with a private lender, you’ll lose access to many repayment options, forgiveness programs, and other benefits. The new loan is just like any other loan you’d take out from a private lender. Refinancing with a private lender does have a couple of advantages. You can refinance private education loans that aren’t eligible for federal student loan consolidation. And, if you default on a private loan, lenders and servicers have to work a little harder to collect from you. They can’t jump straight to garnishing your wages or taking your tax refund like the U.S. Department of Education can. 

How to Consolidate Your Federal Student Loans

First, determine which of your loans are eligible for consolidation. Loan type isn’t the only factor. If any of the loans you want to consolidate is in default, you’ll have to take additional steps before applying for consolidation. 

You can complete a Direct Consolidation Loan application online or print out the application and mail it in. To fill out the application, you’ll need details about your existing loans. If you don’t have the information you need, you can contact your servicer. If you don’t know who your loan servicer is, you can call the Federal Student Aid Information Center (FSAIC) at 1-800-433-3243. They’ll give you the name of your provider. If you know who your servicer is but don’t know how to contact them, you can find that information on the same website provided above for the consolidation application. 

If you have questions about consolidation before you apply, you can call the Student Loan Support Center at 1-800-557-7394. 

Consolidation Steps

1. Determine which eligible loans you want to include in the consolidation

2. Provide detailed information about those loans on your application

3. Choose standard repayment or an income-driven repayment plan

4. If you choose an income-driven plan, complete the appropriate request form

5. Make sure to read and understand the terms before submitting the application

If you have questions after you apply, you’ll need to contact your new servicer. Make sure you take note of that information when you complete your application. After you submit your application, keep making the payments on your original loans until the consolidation process is complete. 

Let’s Summarize...

Federal student loan consolidation is a different solution from private refinancing. For most people who are eligible, consolidation is a better option - at least, for federal student loans. That’s because refinancing with a private lender cuts off valuable options such as deferment, forbearance, loan forgiveness, and income-driven repayment. 

Consolidation offers many benefits, including simplified repayment and lower monthly payments. But, consolidating at the wrong time or including the wrong loans can cut off access to important benefits. So, it’s critical that you educate yourself about consolidation and make informed decisions about whether to consolidate, when to consolidate, and which loans to include in your consolidation.