Federal student loan consolidation can help you manage multiple monthly payments to multiple servicers.
If, like the vast majority of college graduates, you acquired student loan debt through federal student aid, you likely have more than one loan, which means more than one bill. Trying to juggle all of them can quickly get confusing and even overwhelming as you struggle to keep track of who owes what and when.
Fortunately, student loan consolidation allows you to combine all of those payments into one simplified monthly bill. But while this makes the checkout process easier, consolidation isn’t always a good idea. There are times when you should definitely think twice about eliminating your old student loans with a new one.
What is student loan consolidation?
Consolidating your student loans means combining all of your old loans into a new one. The government issues you a single direct federal consolidation loan for the full amount of your original loans.
The new consolidation loan pays off the original loans, leaving you with only one consolidation loan to repay. Therefore, you will have a new monthly payment for a single loan servicer – the company that manages your payment on behalf of the federal government (your lender).
Other than combining your loans, the rest remains roughly the same. You still owe the same amount. And your new interest rate remains roughly the same as the combined weighted average of all your previous loans.
But you will have the opportunity to choose one of the federal government’s payment plans, several of which include the option to extend your payment up to 30 years. However, if you continue to pay with the standard 10-year payment plan, it won’t change much.
When to consolidate your student loans
The purpose of the direct consolidation loan program is to simplify the repayment process. It also makes many repayment programs available for otherwise ineligible student loans. So if you want to make a single monthly payment, lower your monthly payment, or apply for an income-based payment plan, student loan consolidation may be what you need.
It is not suitable for everyone. But there are certain circumstances in which federal student loan consolidation makes sense.
1. You want to make a single monthly payment
Making a monthly payment to a single institution is a popular reason to consolidate your student loans. It also makes consolidation an optimal option for most borrowers, regardless of their financial circumstances.
Multiple bills from various lenders come with different amounts due and different due dates, making it difficult to budget and track payments. It can lead to late payments and confusion about the total amounts left to repay. If you prefer to worry about only one bill each month, consolidation allows you to do so.
2. You want lower monthly payments
If you’re having trouble paying your student loans every month, consolidation can make it easy. By opting for one of the payment plans that allows you to extend the payment term, you will automatically reduce your monthly student loan payment. These include extended reimbursement, gradual reimbursement, and income-based reimbursement (IDR).
Keep in mind that each of these comes with different repayment terms and requirements. Therefore, the time it takes to pay depends on the student loan repayment option you select. It can also depend on the total amount you borrowed, and some programs allow longer repayment terms for larger loan amounts.
But keep in mind that this almost always means paying more for your long-term student loans. Your interest rate will not go down. It remains fixed for the life of the loan. And when you pay the same interest over a longer period, you end up paying a lot more.
3. You want to qualify for a refund based on income
IDR repayment plans are the only way to lower your monthly payment while gaining access to student loan forgiveness programs, including the Public Service Loan Forgiveness Program (PSLF).
The PSLF allows borrowers making payments under an IDR plan while working full time for a public agency or nonprofit organization to have their loan balance forgiven after just 10 years. That is the same time period as the standard payment plan.
While all federal direct subsidized and unsubsidized loans are eligible for IDR plans, other loans must be part of a direct consolidation loan to qualify. These include subsidized and unsubsidized Stafford loans, federal PLUS loans for graduate and professional students, and federal Perkins loans.
But keep in mind that if you’ve already made qualified direct loan forgiveness payments, consolidating them with your other loans restarts the process. In other words, you will lose credit for payments you have already made.
4. You are in default
Most federal student loans are in default when you don’t make payments for 270 days, or about nine months. Federal Perkins loans can go into default immediately if you miss a payment by the due date.
Once delinquent, your loan is due in full and you no longer have access to federal repayment programs. You also owe the unpaid interest and fees associated with collecting the amount.
Worse still, the federal government has extraordinary powers to collect the amount owed, including garnishing your wages, garnishing your tax refunds, and garnishing your Social Security. They can do all of that without going through the process of suing you.
There are three ways to get out of default: pay the balance in full, go through the student loan rehabilitation process, or consolidate your loans. If you cannot pay the balance in full, consolidation is the fastest route out of default. To qualify, you must make three consecutive monthly payments on time and agree to repay your loans under an IDR plan.
Going this route makes the most sense if you need to quickly get out of the defaults. But keep in mind that consolidation will not remove the default line from your credit report. Only student loan rehab can do that.
To rehabilitate your loans, you must make nine monthly loan payments within 10 consecutive months. Your payments must be 15% of your discretionary income. Your discretionary income is the difference between your adjusted gross income on your tax return and a certain percentage of the poverty level for a family of your size in your state of residence. The percentage varies between payment plans, but is generally 150%.
You can only repay your loans once, so if you choose to do so, make sure you can afford the payments.
When not to consolidate your student loans
Student loan consolidation is a good strategy to simplify or reduce monthly payments, but it is not always beneficial. Consolidation could mean that you will lose access to certain benefits, and once you consolidate your loans, you will not be able to reverse them.
Fortunately, you don’t have to consolidate all of your loans. You can always keep loans for which you do not want to lose certain borrower benefits outside of consolidation.
1. You have a Perkins loan
Perkins loans were low-interest student loans for undergraduate and graduate student loan borrowers in dire financial need. It is no longer possible to get a Perkins loan, as the government suspended the program on September 30, 2017.
But if you already have one, the payment plans available for Perkins loans are very different from other federal student loans. To learn about Perkins’ payment options, you should speak with the educational institution that made the loan or its servicer.
One of the unique options for Perkins loans is the ability to be forgiven in exchange for working in certain professions in high-need areas. But keep in mind that if you consolidate your Perkins loan with your other loans, you will lose access to the Perkins loan cancellation program . That’s because if you consolidate your loan, you no longer have a Perkins loan. You have a direct federal consolidation loan.
2. You have been paying with an IDR plan
Only direct loans qualify for most IDR plans, with the sole exception of the income-based payment, which allows income-based payment on Stafford loans. Therefore, consolidating your loans will give you access to all IDR programs if you have non-direct loans.
However, if you have been paying direct loans under an IDR plan, if you consolidate them into a new loan, you will lose any progress you have made with them. That’s because the old loan no longer exists.
For example, let’s say you’re trying to qualify for PSLF and you’ve made one year of payments on one of your direct loans under an IDR plan. That means you only have to make another nine years of payments on that loan before you can qualify for your balance forgiveness.
But you have other student loans. So you decide to consolidate all your loans and put them all in IDR to work towards the PSLF. If you do, you lose credit for all payments made on that first loan and the clock resets. That means 10 more years of payments on that loan, not nine.
The best thing to do in this case is to keep the original loan out of the new direct consolidation loan application while you consolidate the rest so that they also qualify for the PSLF.
3. You have a PLUS loan for parents
If you borrowed for your own education and are still repaying those loans along with a parent PLUS loan that you got to help pay for your child’s education, don’t consolidate them.
You will lose eligibility for all payment options except income-dependent payment (ICR), which is the least favorable of the IDR programs. The ICR calculation for discretionary income allows less space and monthly payments are calculated as a higher percentage of your discretionary income.
Also, while both students and parents can consolidate their loans, students and parents cannot consolidate theirs. You can only consolidate your own loans.
4. You want to consolidate private and federal loans
You can only consolidate federal loans through the federal direct consolidation program. If you have private loans that you want to consolidate with the federal ones , the only way to do that is by refinancing.
Refinancing is like consolidation in that all your current loans are combined into one loan. However, the money comes from a private lender, not the federal government.
Plus, refinancing has its drawbacks. It can be difficult to qualify, as your credit score must be impeccable. And if you refinance your government loans along with your private loans, you lose access to all the government repayment programs because you no longer have a federal loan (it’s a private one). That includes IDR and more generous forgiveness and forbearance terms.
5. You want to save money on your refund
Although consolidation simplifies payment and may even lower your monthly payment, you are not likely to save money in the long run by consolidating your loans.
First, your interest rate will not be lower after consolidation. The rate on your new consolidation loan is the weighted average of the interest rates on all of your old loans rounded to the nearest eighth of 1%. That means it stays more or less the same as before.
Second, if you opt for a longer repayment term than the standard 10-year plan, you could be considering paying thousands or even tens of thousands more over the life of the loan thanks to the accumulation of interest.
Third, any unpaid interest on your loans is compounded by the principal balance at the time of consolidation. That means it is added to the original balance, so you end up paying interest on a new, higher balance with your consolidation loan. In other words, it pays interest in addition to interest.
If you can qualify, refinancing is the only way to consolidate all your loans and save money on your payment. Private student loan refinance lenders like SoFi stay competitive with each other by offering the lowest interest rates. A lower interest rate on your loan means you pay less overall, and your monthly payment could be even lower. But always be careful when refinancing federal loans, as it means losing access to federal programs.
Figuring out the best way to pay back your student loans can be tricky. It involves weighing the repayment plan that will give you the best long-term savings against your ability to manage your life and student loan debt today. Compounding the situation, college graduates can take a while to find a job, and entry-level work is often poorly paid once they do.
Fortunately, there are a variety of programs available to facilitate the repayment of federal student loans. Even better, you are not caught up in most of them. When your life or income changes, you can always choose to switch to a different payment plan.
But that’s not the case with consolidation. Once you consolidate, it is irreversible because your previous loans are gone. So think carefully before you consolidate and make sure you understand what it will mean for you and your future.