How to consolidate student loans
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Student loan consolidation is the process of taking multiple federal student loans and reorganizing them into a single new loan. Federal student loans are eligible for consolidation through the U.S. Department of Education’s Direct Consolidation Loan program.
When you consolidate, the new loan may feature a longer repayment period and a lower monthly payment, though your interest costs may be higher over time. If you’re struggling with your student loan payments, consolidation may be a potential solution that’s worth considering.
What is student loan consolidation?
The Direct Loan Consolidation program is a federal program that makes it possible for you to replace one or more existing federal loans with one new loan, either with your existing loan servicer or with a new one.
The process can open up opportunities with certain programs, including the Public Service Loan Forgiveness (PSLF) program and, depending on the type of loans you have, certain income-driven repayment (ICR) plans. A Direct Consolidation Loan can also extend your repayment period to as long as 30 years.
Student loan consolidation vs. refinancing
The difference between student loan consolidation and refinancing is subtle, and the terms are often confused. Both methods involve taking out a new loan to better manage multiple outstanding balances.
However, refinancing is the process of paying off your old loans with a new loan with a private lender — it is not available through the federal government.
Some of the most significant differences between consolidating and refinancing student loans are:
- Interest rate: When you refinance student loans, you might be able to secure a lower interest rate on your new loan. A federal student loan consolidation, on the other hand, gives you the weighted average of your existing loans as your new interest rate.
- Repayment options: With a federal student loan consolidation, you may qualify for more repayment options, such as income-driven repayment. With refinancing, you’ll have a range of term lengths to choose from.
- Default solutions: If you’re past due on your federal student loans, you will likely have a hard time qualifying to refinance with a private lender. However, you might still be eligible to consolidate your loans either with a new income-driven repayment plan or after you make a new, approved payment arrangement.
- Federal benefits: Consolidating your federal student loans allows you to retain benefits like federal forbearance periods, Public Service Loan Forgiveness and income-driven repayment. Since refinancing is only available through private lenders, you will lose those benefits if you refinance your federal loans.
If you’re looking for a lower interest rate and aren’t planning on using any federal benefits, refinancing your student loans with a private lender might be a good fit. On the other hand, if you have a poor credit score, need to bring your loans current or want to hang onto your federal student loan benefits, consolidating your federal student loans might make more sense.
Before making the choice between consolidation and refinancing, use a student loan refinance calculator to help you crunch the numbers. The U.S. Department of Education also provides a tool called Loan Simulator to assist you in the decision-making process.
Should you consolidate your loans?
As with any financial decision, it’s important to do your homework before you decide to consolidate your federal student loans. One of the best ways to determine whether consolidation is the right move in your situation is to compare the benefits and drawbacks.
The main benefits of federal student loan consolidation include:
- Longer repayment periods: If you need more cash in your pocket right now, consolidating your federal student loans may help you extend the life of your loan. This longer repayment period will generally reduce the size of your monthly payments.
- One convenient monthly payment: Consolidating, like refinancing, has the effect of combining multiple monthly payments into one.
- Retain federal student loan benefits: When you consolidate federal student loans, you can still take advantage of income-driven repayment plans, forgiveness options and repayment hardship plans in the future. If you refinance your loans with a private lender, these benefits go away.
- Potentially qualify for new benefits: In some cases, consolidating federal student loans may help you qualify for an income-driven repayment plan or Public Service Loan Forgiveness (PSLF). If you consolidate before May 1, 2023, any payments you made prior to consolidation while working for an eligible employer will count toward your monthly payment requirement.
Federal student loan consolidation isn’t the right option for everyone. Some drawbacks to consider are:
- Potentially higher interest rate: The interest rate on your new loan will be the weighted average of the loans you consolidate, rounded up to the nearest eighth of a percent. So while you might be able to qualify for a lower interest rate if you refinance to a private loan, consolidation doesn’t come with the same potential benefit.
- Higher overall interest: Extending your repayment timeline will ultimately increase the total amount you pay in interest.
- Potential loss of certain benefits: Consolidation may result in the loss of some borrower benefits, like discounts on interest rates, principal rebates and certain student loan cancellation options.
Requirements for consolidation
The U.S. Department of Education sets forth certain requirements that you’ll need to satisfy in order to consolidate your federal student loans. For starters, any loans you wish to consolidate must be in either the grace period or active repayment status.
If your loans are in default, you’ll need to make an approved repayment arrangement (i.e., three back-to-back monthly payments) before you can consolidate. As an alternative, you may be able to set up your new Direct Consolidation Loan under one of four income-driven repayment plans: Income-Based Repayment, Pay As You Earn, Revised Pay As You Earn and Income-Contingent Repayment.
In general, you can’t consolidate an existing federal consolidation loan. There’s an exception to this rule, however, if you include another eligible student loan in your new consolidation. The Department of Education might also allow you to reconsolidate an existing FFEL Consolidation Loan that’s past due or in default if you can qualify for a new income-driven repayment plan.
On top of the requirements above, only certain federal student loans are eligible for consolidation:
- Auxiliary Loans to Assist Students.
- Direct PLUS Loans.
- Direct Subsidized Loans.
- Direct Unsubsidized Loans.
- Federal Insured Student Loans.
- Federal Perkins Loans.
- Guaranteed Student Loans.
- Health Education Assistance Loans.
- Health Professions Student Loans.
- Loans for Disadvantaged Students.
- National Defense Student Loans.
- National Direct Student Loans.
- Nurse Faculty Loans.
- Nursing Student Loans.
- PLUS Loans from the Federal Family Education Loan (FFEL) Program.
- Parent Loans for Undergraduate Students.
- Subsidized Federal Stafford Loans.
- Supplemental Loans for Students.
- Unsubsidized and Nonsubsidized Federal Stafford Loans.
How to consolidate your student loans
If you would like to consolidate your federal student loans, you can complete the Direct Consolidation Loan application online at StudentAid.gov. After you log in, select the loans you’d like to consolidate, choose a repayment plan and select a loan servicer. Alternatively, you can submit an application by mail. It generally takes a month or two for the application to process.
“You should continue to make your regular payments on your loans if payments are currently due until your consolidation has been approved,” says Jessica Ferastoaru, student loans specialist for Take Charge America. “Once approved, you will have one monthly payment due to the new servicer managing your Direct Consolidation Loan.”
If you have federal student loans and want to merge your monthly payments into one payment without losing federal benefits — access to PLSF and ICR plans, for example — your only option is to consolidate your student loans through the Direct Consolidation Loan program. But before you do this, consider potential drawbacks. For example, if you choose a longer repayment term, you could pay more in interest. Plus, unlike student loan refinancing, consolidating your loan won’t give you a chance to lower your overall interest rate.