Should You Consolidate Federal Student Loans?

October 14, 2020 | by Jacob Hamilton

student graduating

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When you said you wished college would last forever, paying off student loans for years afterwards probably wasn’t what you had in mind. Consolidating your student loans may be a great strategy to improve long-term money management, but it’s not the right move for everyone.

There are 42.6 million people who have outstanding principal and interest balances with the Federal Student Aid. Traditionally, that money is borrowed from multiple sources, which can get tricky with various due dates and different minimums. You can only consolidate your loans once, so consider the long-term implications before committing.

What Is Student Loan Consolidation?

Student loan consolidation involves bundling multiple payments with various interest rates into one lump sum with one fixed interest rate. Keep in mind that there are different rules to consolidating private and federal loans.

When you consolidate your federal student loans, the interest rate won’t change for the duration of the loan. Once consolidated, you can expect to pay a reduced monthly amount for a longer term, often without giving up other federal government benefit programs.

If you have both private and federal student loans you can go through your private lender to consolidate all of your loans together, but you cannot use a federal Direct Consolidation Loan to do so. This means that if you use a private lender to consolidate your private and federal loans, you may lose out on some repayment options for your federal loans.

student loan consolidation

When Should You Consolidate Federal Student Loans?

While consolidating your loans isn’t always the best strategy, doing so can be beneficial depending on a few factors. If you want a set interest rate, a lower monthly payment and you don’t qualify for loan forgiveness, consolidating might be the right approach to repay your loan.

Change Variable Interest Rates to a Set Interest Rate

When you have multiple variable interest rates across a few student loans, consolidating is beneficial to streamline your month-to-month payment with one fixed interest rate.

fixed interest rate

The stability of fixed payments is one reason consolidation is popular. Consolidating takes the guesswork out of monthly payments so you know exactly how much you’ll owe every month for the entirety of the term.

Lower Your Monthly Payments

As a graduate, you automatically become enrolled in a 10-year standard repayment plan. If you’re concerned about defaulting on your monthly payments, loan consolidation might be the best option. Once you consolidate your loans with a Direct Consolidation Loan, the monthly payments will be lowered if the repayment term is extended. Although you’ll pay more in interest over the course of the loan, you won’t risk hurting your credit by not being able to make a higher monthly payment.

Loan Forgiveness or Income-Based Plans Aren’t Accessible

Beyond streamlining your monthly payments, consolidating your federal student loans may make you eligible for a Direct Loan Program where you otherwise might not have been qualified. This means loan forgiveness and income-based plans may become options when repaying student loans.

  • Loan Forgiveness: Loan forgiveness or public service loan forgiveness (PSLF) will negate the remainder of your loan after 120 qualifying payments if you work for a qualifying organization, including nonprofits and government agencies.
  • Income-Based Plans: Income-driven repayment (IDR), repay as you earn (REPAYE), pay as you earn (PAYE) and income-contingent repayments (ICR) extend the length of your repayment term with a fixed percentage of discretionary income. After 20 or more years of consecutive payments, the remaining balance is forgiven. You will, however, still have to pay taxes on the forgiven balance of the loan.
consolidating vs refinancing

Is It Better to Consolidate Federal Student Loans or Refinance?

If you’re deciding between consolidating your student loans or refinancing them, first ask yourself what type of loan you have. Like we said above, if some or all of your loans include borrowing from a private lender, you won’t be able to consolidate that part of the loan under a federal Direct Consolidation Loan. If you have both federal and private student loans, refinancing is an additional option.

A refinancing program will grant access to new interest rates, a new repayment period and new minimum payments.

Student Loan Consolidation vs. Refinancing

Multiple loans mean multiple variable interest rates. As the market cycles, the amount you’re expected to repay could be different month to month. There are two options to combat this volatile rate:

  • Refinancing: When you refinance a loan you can negotiate a lower interest rate with the same or longer term, depending on your credit score. While there’s potential for your minimum payment and interest rate to decrease, the repayment amount won’t change. Additionally, refinancing federal student loans will make you ineligible for loan forgiveness and income-based plans.
  • Consolidating: With multiple federal loans, consolidating allows you to bundle the total amount and gives an average interest rate between the existing loans. While the fixed minimum payment each month will be lower, the term to pay your loan back may increase considerably. The only way to avoid paying the entirety of the lump sum loan is by loan forgiveness or income-based plans, which you may still be eligible for after consolidating your loan.

Pros and Cons Student Loan Consolidation

It’s important to weigh the pros and cons of consolidating your debt before making a final decision. You can only consolidate your loan once, and if the federal interest rate drops, you’ll be stuck with the consolidated rate.

Pros of consolidating federal student loans:

  • Easier to manage: Consolidating student debt takes various interest rates on multiple payments and merges them into one manageable payment.
  • Choose loan servicer: When consolidating debt, you have the choice of a federal loan servicer.
  • One interest rate: Instead of having multiple rates, consolidating student loans averages the interest into a single fixed rate.
  • Lower monthly payments: Consolidating loans extends the repayment period for the same amount, lowering the monthly payment.
  • Repayment options: Gives access to repayment options and forgiveness programs you may not have had access to prior.
  • Maintain loan forgiveness: Unlike refinancing student loans, consolidation may retain existing loan forgiveness and income-based options.
  • Protects credit: With lower monthly payments, there’s a lower risk to default on the loan.
  • Automatic debit: When the loans are consolidated, you have the option to automatically debit the funds each month for consistent on-time payments.

Cons of consolidating student loans:

  • Higher interest: Because the interest rate is rounded up, you may end up paying a higher amount than you were previously.
  • Unchangeable interest rate: Even if the federal interest rate decreases, you’re stuck paying the average interest rate calculated at the beginning of the consolidation period.
  • May lose benefits: You may lose some loan forgiveness benefits.
  • Waives the grace period: You no longer have the six-month grace period if you consolidate.
  • You can only consolidate once: You only have the opportunity to consolidate your loans one time in the lifetime of the payment.

While student loan consolidation is a great option for some, it’s not always the best avenue for others. Consolidation can’t be undone, and it’s important to think about how the lengthened time might affect your financial future. Consider how your student loans will affect your credit before making the leap to refinance or consolidate.

Sources: Federal Student Aid | CFPB 1, 2

Jacob Hamilton

Jacob Hamilton

GM of

With his master's degree from the University of Phoenix, Jacob has been working as the General Manager for for 2 years. Jacob is passionate about consumer finances and doing everything he can to make credit repair accessible....

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