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

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

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If you’re tired of making monthly payments on multiple student loans, you may want to consider consolidating them. Student loan consolidation allows you to combine your various federal student loans into one loan with one monthly payment. At first it may sound like a no-brainer, but it’s important to understand how loan consolidation works and consider the pros and cons.

How Does Student Loan Consolidation Work?

Student loan consolidation works by combining all of your federally issued student loans into a new loan, called a Direct Consolidation Loan. Your original student loans are closed and paid off by this new loan. Your new student loan balance is the total of the previous loans, and your new student loan interest is the weighted average of your previous student loan rates.

Consolidating your loans can simplify your life, but it does require you to forgo the individual protection and flexibility offered by each loan in exchange for the convenience of one payment. For example, Perkins Loans have a nine-month grace period and cancellation benefits for teachers. Loan consolidation is also a good choice for those who would benefit from a lower monthly payment extended over a longer period, which provides short-term benefits but results in a more expensive loan over time.

TermOld loan 1Old loan 2Old loan 3New loan
TypeDirect Subsidized LoanDirect Unsubsidized LoanFederal Perkins LoanDirect Consolidation Loan
Interest rate5.05%5.05%5.00%5.04%
Monthly payment$106$159$64$205
Loan period (years)10101020
Total payments$12,757$19,136$7,637$49,265

How to Calculate Your Student Loan Consolidation Rate

Your new student loan consolidation interest rate will be the weighted average of the interest rates from your individual student 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%. There are no fees to consolidate federal education loans within the Direct Consolidation Loan program.

Consolidated Loan Repayment Terms

Your repayment terms will range from 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, but you are likely to pay more over time. 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. Repayment of your new Direct Consolidation Loan will typically start 60 days after the loan is disbursed.

Eligibility and Requirements for the Direct Consolidation Loan Program

If you have multiple federal student loans and you have dropped below half-time status, graduated or left school, you should be eligible for the Direct Consolidation Program as long as you are up-to-date on your payments. Private and graduate school loans are not eligible for a Direct Consolidation Loan. If you have both federal and private loans you want to consolidate, you'll have to refinance your loans with a private lender.

Here Are the Federal Loans Eligible for Consolidation:

Federally Issued Loans
Direct Subsidized LoansPLUS loans from the FFEL ProgramHealth Education Assistance LoansGuaranteed Student Loans
Direct Unsubsidized LoansSupplemental Loans for Students (SLS)Health Professions Student LoansNational Direct Student Loans
Subsidized Federal Stafford LoansFederal Perkins LoansLoans for Disadvantaged StudentsNational Defense Student Loans
Unsubsidized Federal Stafford LoansNursing Student LoansFFEL and Direct Consolidation Loans*Parent Loans for Undergraduate Students

Direct PLUS LoansNurse Faculty LoansFederal Insured Student LoansAuxiliary Loans to Assist Students

*Only under certain conditions

Borrowers who are current on payments can consider consolidation, but if your loans are in default, you'll need to contact your servicer to restore the loans before moving ahead. Once the loan is consolidated, you can choose a payment plan from several options.

Direct Consolidation Loan Servicers

When you apply to consolidate your student loans, you'll get to choose your student loan servicer. That will be the company that sets your deadlines, tells you your monthly payment, receives the check or direct debit, and answers any questions about your new loan. There are nine companies that service this federal program, including some that service the top private student loan refinancing lenders.

OSLA Servicing
Granite State - GSMR
Great Lakes


Should I Consolidate My Student Loans?

Whether you should consolidate your student loans depends on how important convenience and lower monthly payments are to you compared to paying less overall on your loans while paying them off faster. Below, we walk through the pros and cons to help you decide if student loan consolidation is for you.

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

Pros and Cons of Student Loan Consolidation

Pro: You'll have one monthly payment.

Having one monthly payment makes it easier to track what you owe, making it less likely you'll forget or miss a bill. If you had four servicers, that's four sets of logins, passwords and monthly payments to sort out every month, and it's harder to monitor your checking account balance when there are different due dates.

Pro: You'll lower your monthly payments.

You can lower payments on federal loans by extending your repayment 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 $131 but the total interest more than doubles.

Here is an example assuming the average student loan debt of $32,731 at 2018 interest rates of 5.05%:

  • 10 years: Monthly payment of $348, total interest payments of $9,025 and total payment of $41,756
  • 20 years: Monthly payment of $217, total interest payments of $19,329 and total payment of $52,060
  • 30 years: Monthly payment of $177, total interest payments of $30,884 and total payment of $63,615

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. You can always increase your monthly payment once you're back on your feet to minimize the lifetime interest you pay.

Con: You'll pay more in interest over time.

A lower bill might make your life easier, but the trade-off is you'll pay more interest over the duration of the loan. As demonstrated by the above example, extending your repayment term by 10 years can more than double your total interest payments. If you value paying off your debt quickly , 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 redefining wants versus needs may help save you money quickly.

Con: You may give up forgiveness and repayment options.

If you have a Perkins loan, 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. But when you consolidate a Perkins Loan, you're responsible for those interest payments. Borrowers employed as teachers, nurses, law enforcement or Peace Corps volunteers can lose the option of having their Perkins Loans canceled or forgiven. Furthermore, if you combine all of your federal loans, you won't be able to strategically prepay your more expensive loans first.

Student Loan Consolidation vs Refinance

Refinancing your loans can also be a good option. As stated above, federal student loan consolidation is only available for federal issued loans, meaning that you won't be able to include your private student loans. Unlike student loan consolidation, refinancing can combine your federal and private loans into one bill with a new interest rate. Depending on your credit score, refinancing your loans could qualify you for a better rate than you’re currently paying or than you would get with a Direct Consolidation Loan.

Despite not being able to lower your interest rate, federal loans have benefits that are not offered by private student loan companies. Private lenders typically do not offer income-driven repayment plans, student loan forgiveness, discharge and cancellation, and guaranteed forbearance and deferment options. These options can come in handy, especially for borrowers going through financial troubles.

How to Start Consolidating My Student Loans

If you've decided to consolidate your student 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 information, Social Security number, address and employment information
  • References: two people who don't live with 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 the required information and sent in your application electronically or through the mail, the servicer you selected will complete the actions needed to consolidate your loans. You can reach out to your selected consolidation servicer if you have any questions about your application. Remember to keep making payments on your loans until your consolidation servicer confirms your loans have been paid off by your new Direct Consolidation Loan.

Ting is a ValuePenguin Co-Founder. She previously evaluated corporate mergers and acquisitions as a Financial Analyst at Citigroup.

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.