Student Loan Consolidation: What Is It? Should I Do It?

Student loan consolidation combines your different federal loan payments into one easy monthly payment. You’d be giving up the individual protection and flexibility from each individual loan in exchange for the convenience of having one payment. While you don’t get a better interest rate, you will likely have lower monthly payments at the expense of a longer loan term.

How Do Student Consolidation Loans Work?

Consolidation works by combining all of your federally issued student loans into a new loan, called a Direct Consolidation Loan. Your original loans are paid by this new loan and are closed, effectively becoming replaced by the new loan. Your new loan balance is the total of the previous loans, and your new interest is the weighted average of your previous rates. You'll lose some protections from your old loans, but you can reduce monthly payments by extending the term.

TermOld Loan 1Old Loan 2Old Loan 3New Loan
TypeDirect Subsidized LoanDirect Unsubsidized LoanFederal Perkins LoanDirect Consolidated Loan
Interest Rate3.76%3.76%5.00%4.00%
Monthly Payment$100.00$150.00$63.64$187.85
Loan Period (years)10101020
Total Payments$12,012.97$18,019.59$7,636.69$45,085.44

New Consolidated Loan Interest Rate

The weighted average of the interest rates from your individual loans, rounded up to nearest one-eighth of a percent (0.125) and capped at 8.25%. To calculate this, you take the percentage that each loan makes up of the total amount, and multiply it by that loan’s interest rate. Do this for all loans, sum up the adjusted interest rates, and round up to the nearest increment of one-eighth of 1%. The weighted average for the Direct Subsidized Loans in this example would be 32% x 3.76% + 48% x 3.76%% + 19% x 5.00% = 4.00%, with no need to round up. There are no fees to consolidate federal education loans within the Direct Consolidation Loan program.

Consolidated Loan Repayment Terms:

10 to 30 years depending on the amount of student debt you have and how much time you select to repay it. The monthly payment for a 10-year loan will be higher than the monthly bill for a 30-year loan. To decide between your options, evaluate how much you can afford with your current budget against the higher interest expense you’d foot over the longer term of the loan. Our new graduate could pay $313.64 per month and keep his duration at 10 years, or he could choose to pay $187.85 per month, extend his loan to a 20 year period. By extending his loan period, he lowers his monthly payments, but winds up paying $7,448.64 more in interest expense over the extra ten years ((New loan of $187.85 x 240) - (Old loans of $100 x 120 + $150 x 120 + $63.64 x 120)). Repayment of the new Direct Consolidation Loan typically starts 60 days after the loan.

Eligibility and Requirements for the Direct Consolidation Loan Program

Only federal student loans can be consolidated in this program, and only when you drop below half-time status (or even graduate or leave school). Private college or graduate school loans can't be bundled within the Direct Consolidation Loan Program. If you want to consolidate your private and federal loans, you'll have to refinance it outside of this program.

Federally Issued Loans
Direct Subsidized LoansPLUS loans from the FFEL Program
Direct Unsubsidized LoansSupplemental Loans for Students (SLS)
Subsidized Federal Stafford LoansFederal Perkins Loans
Unsubsidized Federal Stafford LoansFederal Nursing Loans
Direct PLUS LoansHealth Education Assistance Loans

It's best that all loans are current, with payments still being made and nothing defaulted. If they're in default, you should speak to your servicer to come up with a repayment plan and abide by it before you can consolidate. Otherwise, you'll have to pay the newly consolidated direct loan under an income-based, pay-as-you-earn, or income-contingent repayment plan.

Direct Consolidation Loan Servicers

Once you consolidate, you'll have to pick a new servicer. This new servicer will be the company that sets your deadline, tells you your monthly payment, receives the check or direct debit, and answers any questions about your new loan. There are currently four major companies that service this program and some of the top student loan companies.

Great Lakes
Navient (fka Sallie Mae)

Should I Consolidate My Student Loans?

It depends on how important convenience and lower monthly payments are to you compared to higher long-term interest expense, and less optionality. We'll walk through each of the points and considerations below the summary table.

Consolidate IfDon't Consolidate If
You want one easy payment to rememberYou'd rather minimize interest costs over the life of the loan
You need lower monthly paymentsYou want to preserve forgiveness and repayment options

Benefit: One Monthly Payment

Having one monthly payment makes it easier to track, and less likely to forget and miss. If you had four servicers, that's four sets of logins, passwords, and monthly payments to sort out every month - not to mention that it's harder to monitor your checking account balance when there are different due dates. You'll have a new term, likely pay more interest expense, and may lose forgiveness benefits from your Perkins package. If you already began paying your loans off, your loan will get reset at 10 years, but you can effectively avoid the higher interest cost over that life by making higher monthly payments than what is suggested. There's no penalty for that.

Benefit: Lower Monthly Payments

Students can lower payments on your federal loans by extending the payback period in a consolidation. The longer the term, the lower the monthly payment and the higher the total interest you pay overall. In this simple scenario below, extending a 10-year loan to 20 years reduces the monthly payment by $109, or 41% versus the 10-year bill, but the total interest more than doubles. Example assuming the average student loan debt of $26,700 at 2016 interest rates of 3.76%:

  • 10 Years: Monthly payment of $267, total interest payments of $5,375 and total payment of $32,075
  • 20 Years: Monthly payment of $158, total interest payments of $11,326 and total payment of $38,026
  • 30 Years: Monthly payment of $124, total interest payments of $17,869 and total payment of $44,569

Some of your lower monthly payments might be offset by an increase in the new weighted average interest rate by one-eighth of a percent. On the plus side, interest rates greater than the 8.25% cap get reduced. This example does not factor that in - otherwise interest rates would be 3.875% instead of 3.76%. You can always increase your monthly payment once you're back on your feet to minimize the lifetime interest you pay.

Consideration: Minimized Total Interest

A lower bill would definitely make your life easier, but the tradeoff is you'll pay more interest over the duration of the loan. If you value not being in debt longer, you'll have to get creative in evaluating options. Moving back home, switching from a smartphone to a regular cell phone, cooking in large batches, selling some possessions and re-defining wants versus needs may help save you money quickly. Alternatively, consider concentrating most of your payment toward the loan with the highest interest rate, such as a Perkins or a Direct PLUS loan if you're a graduate student, while making minimum payments on the rest. This helps you deal with the more expensive loan first.

Consideration: Maximizing Forgiveness and Repayment Options

If you have a Perkins loans, consolidation will erase favorable loan forgiveness and interest subsidies. Interest accrued while you're in school or when the loan is deferred gets paid by the government - when you consolidate the Perkins, you're on the hook. Borrowers employed as a teacher, nurse, law enforcement or in the Peace Corps can lose the option of having their Perkins loans cancelled or forgiven. Furthermore, if you combine all of your federal loans, you won't be able to strategically prepay your more expensive loans first.

How to Start Consolidating Your Education Loans

Start by gathering all of your account statements, notices from servicers, and education loan records. Then log in to with your FAFSA ID to begin applying for consolidation. Here is a preview of some of the information you'll be asked:

  • Borrower information: contact info, SSN, address, employment information
  • References: two people living in different addresses from you
  • Your Federal Loans: servicer address, loans you want to consolidate and keep separate
  • Repayment Plan: choose between six plans: Standard, Graduated, Extended Repayment, Income-Based, Pay as You Earn, or Income-Contingent
  • Understandings, Certifications, Terms & Conditions, and Rights & Responsibilities: read the fine print and accept if you agree
Once you've provided that information, mail the application to your servicer.

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